BEFORE THE STATE BOARD OF EQUALIZATION
FOR THE STATE OF WYOMING
IN THE MATTER OF THE APPEAL OF )
WESTERN FUELS - WYOMING, INC. ) Docket No. 2006-48
FROM A PRODUCTION TAX AUDIT )
ASSESSMENT BY THE MINERAL TAX )
DIVISION OF THE DEPARTMENT OF )
REVENUE (Dry Fork Mine Prod Yrs. 2001-2002) )
FINDINGS OF FACT, CONCLUSIONS OF LAW, DECISION AND ORDER
APPEARANCES
Lawrence J. Wolfe of Holland & Hart, LLP for Western Fuels - Wyoming, Inc. (WFW or Petitioner).
William F. Russell and Martin L. Hardscog, Senior Assistant Attorneys General for the Department of Revenue (Department).
JURISDICTION
The State Board of Equalization (Board) has jurisdiction to hear this appeal. The Board must review final decisions of the Wyoming Department of Revenue (Department) on application of any interested person adversely affected. Wyo. Stat. Ann. § 39-11-102.1(c). Taxpayers are specifically authorized to appeal final decisions of the Department. Wyo. Stat. Ann. § 39-14-209(b); Rules, Wyoming State Board of Equalization, Chapter 2, § 5(a). By letter dated February 28, 2006, the Department notified Western Fuels - Wyoming, Inc. (WFW) of its final determination regarding a production tax audit of WFW’s Dry Fork Mine for production years 2001 and 2002. WFW filed a timely appeal of the Department’s determination on March 29, 2006.
The Board, consisting of Alan B. Minier, Chairman, Thomas R. Satterfield, Vice Chairman, and Board Member Thomas D. Roberts, heard the appeal on October 24, 25, and 26, 2006.
STATEMENT OF THE CASE
When the Department determines the taxable value of coal for purposes of severance and ad valorem taxes, it must use the sale price of coal sold in a bona fide arm’s-length sale to reach fair market value. After an audit of the taxable value reported by WFW, for production years 2001 and 2002, the Department concluded a contract between Petitioner and the Kansas City Board of Public Utilities did not give rise to bona fide arm’s-length sales, and recalculated the taxable value of the tonnage for those years using an alternative method. Petitioner objected to the audit findings and the resulting increase in its taxable value for 2001 and 2002.
We will find for Petitioner.
CONTENTIONS AND ISSUES
WFW identified four contested issues of fact, and four contested issues of law. WFW’s four contested issues of fact were:
1. Is the contract between WFW and Kansas City Board of Public Utilities a bona fide arm’s length agreement, within the meaning of Wyo. Stat. Ann. § 39-14-101(a)(i) and (ii), and Wyo. Stat. Ann. § 39-14-103(b)(vii) and (viii)?
2. Are the prices established in the WFW and Kansas City Board of Public Utilities contract the fair market value of the coal sold to Kansas City?
3. If the contract between WFW and the Kansas City Board of Public Utilities is determined by the Board not to be a bona fide arms length agreement, did the Department use the proper valuation method under Wyo. Stat. Ann. § 39-14-103(b)(viii)?
4. Did WFW know or should it reasonably have known that it was not paying the total tax liability when due, so as to subject WFW to an assessment of interest?
[Petitioner Western Fuels – Wyoming, Inc.’s Issues of Fact and Law and Exhibit Index].
WFW’s four contested issues of law were:
1. Is the Department’s treatment of coal sales to the Kansas City Board of Public Utilities contrary to the coal valuation statutes, specifically Wyo. Stat. Ann. § 39-14-101(a)(i) and (ii), and Wyo. Stat. Ann. § 39-14-103(b)(vii) and (viii)?
2. Did the Department properly determine the sales price for the coal sold by WFW to the Kansas City Board of Public Utilities, if the Department prevails on its argument that the sales is not a bona fide arms length agreement?
3. Is the Department’s assessment of interest consistent with the facts and proper under Wyo. Stat. Ann. § 39-14-108(c)?
4. Whether the Department’s final assessment conforms to the coal valuation statutes and the Department’s rules?
[Petitioner Western Fuels – Wyoming, Inc.’s Issues of Fact and Law and Exhibit Index].
The Department stated seven issues of fact and two issues of law. The Department’s seven issues of fact, several of which refer to the definition of bona fide arm’s-length sale found in Wyo. Stat. Ann. § 39-14-101(a)(ii), were:
1. Is the coal supply agreement between Western Fuels - Wyoming, Inc. (WFW) and the Kansas City Board of Public Utilities (KCBPU)(the “KCBPU contract”) a bona fide arm’s-length sale that can be used to determine the fair market value of coal?
2. Was the coal subject to the KCBPU contract reasonably exposed in a competitive market prior to sale?
3. Who were the parties to the KCBPU contract?
4. Were the parties to the KCBPU contract willing, well informed and prudent sellers?
5. Did the parties to the KCBPU contract have adverse economic interests?
6. Were any of the parties to the KCBPU contract acting under undue compulsion or duress?
7. Does the sales price used by the Department to value Dry Fork coal sold to KCBPU represent fair market value?
[Department’s Issues of Fact and Law and Exhibit Index].
The Department’s two issues of law were:
1. Did the Department properly reject the KCBPU contract as a indicator of the fair market value of coal established by bona fide arm’s-length sale?
2. Did the Department properly value the coal subject to the KCBPU contract using the average price of coal sold to the Laramie River Station pursuant to arm’s-length contracts?
[Department’s Issues of Fact and Law and Exhibit Index].
The Board finds and concludes the contract between Western Fuels - Wyoming, Inc. and the Kansas City Board of Public Utilities was a bona fide arm’s-length sale within the meaning of Wyo. Stat. Ann. § 39-14-101(a)(ii).
FINDINGS OF FACT
A. Western Fuels Association, Inc.
1. Western Fuels Association, Inc. (WFA) was incorporated as a Wyoming non-profit corporation in May, 1974. [Exhibit 512, pp. 125-129]. The original Articles of Incorporation provided that WFA must “at all times be operated on a co-operative non-profit basis for the mutual benefit of its members.” [Exhibit 512, p. 129; Transcript Vol. I, p. 105]. By action of law in 1993, WFA became a mutual benefit corporation under the Wyoming Nonprofit Corporation Act. Wyo. Stat. Ann. § 17-19-1804(a)(i). [See Exhibit 512, pp. 122-124].
2. WFA’s primary place of business is Westminster, Colorado. [Transcript Vol. I, p. 109].
3. According to Rex Johnson, outside counsel to WFA since 1995, WFA’s primary mission is to provide a low cost fuel supply to its members. [Transcript Vol. I, pp. 41-42]. This mission was to be accomplished by bringing municipal, non-profit, and cooperative suppliers of electricity together to have “a bigger footprint in the marketplace.” [Transcript Vol. I, p. 57]. During the period when WFA was originally formed, expansion of the Wyoming coal industry was constrained for various reasons. The entities which formed WFA were having difficulties getting quotes from established coal suppliers. [Transcript Vol. I, p. 59, Vol. II, pp. 377-378].
4. WFA provides other services, most notably arrangements for delivery of coal to its members’ power plants. [Transcript Vol. I, p. 43]. As another service, Johnson cited “a resource to turn to when issues concerning the use of coal – for example, global warming. Western Fuels Association acts as an advocacy group.” [Transcript Vol. I, p. 63]. Johnson was presumably referring to WFA’s curiously named subsidiary, Greening Earth Society, Inc., identified as “a not for profit entity formed to educate the public on the benefits of fossil fuels and carbon dioxide.” [Exhibit 121, p. WF 237].
5. WFA’s purposes were reflected in its Articles of Incorporation. According to the original Articles, one purpose of WFA was to acquire coal to be used as fuel “in the production of energy to be utilized by the members of the corporation in the production of electrical energy for ultimate use by the consumers of each member, or of its members.” [Exhibit 512, p. 126]. WFA reinforced its exclusive focus on the requirements of its members with a 1978 amendment to the Articles of Incorporation which restricted sales of fuel to members, excepting only sales to the United States, a state, or “nonmember customers to effect a disposal of a temporary surplus of [fuels].” [Exhibit 512, pp. 137-138].
6. In July, 1975, the original Articles were amended to provide for three classes of membership: Class A members, Class B members, and Class C members. The rights and privileges of each class of membership were to be set by WFA’s by-laws. [Exhibit 512, pp. 134-135; Transcript Vol. I, p. 45]. Under those by-laws, a Class A member was defined by the member’s commitment to advance funds to WFA for capital and administrative purposes, and to generally purchase all its coal requirements from WFA. WFA initially had no assets, operating capital, or ability to borrow. [Exhibit 509, pp. 83-85; Transcript Vol. I, pp. 45, 48].
7. A Class B member was defined by a contractual commitment to purchase coal for a particular facility. [Exhibit 509, p. 85; Transcript Vol. I, p. 51]. A Class C member was generally one which did not purchase coal. [Exhibit 509, p. 85, Transcript Vol. I, p. 51].
8. Each Class A member was entitled to representation by two directors on the Board of Directors which managed WFA’s “business and affairs.” [Exhibit 109, pp. 89-90. Exhibit 109 is the first of several exhibits which were sealed as confidential, but discussed freely and publicly at the hearing. The confidential exhibits will remain sealed in our record, but the Board will treat all disclosures made during the course of the hearing as non-confidential]. One Class A member, Tri-State Generation and Transmission Association, Inc., was entitled to two additional directors by virtue of its acquisition of a former Class A member. [Exhibit 109, pp. 89-90; Transcript Vol. I, p. 53].
9. Each Class B member was entitled to one director. [Exhibit 109, p. 90]. Class C members had the right to attend meetings of the Board, but had no right to representation on the Board. [Exhibit 109, p. 90].
10. During the audit period, there were eleven directors on the WFA Board. [Transcript Vol. I, p. 55]. Class A members Basin Electric Power Cooperative (Basin), Tri-State Generation and Transmission Association (Tri-State), and Sunflower Electric had a combined total of eight directors. [Transcript Vol. I, pp. 52-54]. Three Class B members had one director each: the Board of Public Utilities of Kansas City, Kansas (Kansas City); the Southern Municipal Power Agency of Rochester, Minnesota; and the City of Sikeston, Missouri. [Transcript Vol. I, p. 55]. Each of the eleven directors was entitled to one vote. [Transcript Vol. I, p. 55].
11. Kansas City holds less than five percent (approximately $325,000) of the equity of WFA. [Transcript Vol. I, p. 64].
12. WFA by-laws provide for a patronage allocation to WFA members “based upon the amount of coal taken on a percentage basis during the course of a year.” [Transcript Vol. I, p. 64]. WFA has never paid dividends to its members. [Transcript Vol. I, p. 64].
B. The 1979 Contract between WFA and Kansas City
13. Kansas City was a Class B member of WFA by virtue of an Amended and Restated Coal Purchase Contract originally executed December 18, 1979 (the 1979 Contract). [Exhibit 109]. The 1979 Contract identifies WFA as Seller and Kansas City as Buyer. [Exhibit 109, p. WF 166]. It further identifies WFA, Kansas City, and their respective intentions as follows:
WHEREAS Seller is a non-profit, member-owned corporation organized for the purpose of obtaining a reliable, low-cost fuel supply to be used in the generation of electric energy by its members, and arranging for the delivery of such fuels to the members’ point of use, such fuels to be obtained either (a) by purchase from others, or (b) by the operation of mines or extraction from other sources of fuel which it may acquire by lease; and
WHEREAS Buyer is a Class “B” member of Seller and is constructing one coal-fired steam generating unit with a net capability of 250 megawatts and is planning to construct an additional unit of at least 250 megawatts at 55th Street and Missouri River, Kansas City, Kansas (hereinafter referred to as “Nearman Creek Power Station”); and
WHEREAS Buyer wishes to obtain a supply of coal necessary to operate Nearman Creek Power Station under conditions of scheduled operation, with the required tonnages of typical Powder River Basin type coal set forth herein.…
[Exhibit 109, pp. WF 166-167]. These recitals are entirely consistent with the purposes and structure of WFA. Supra, ¶ 3-5.
14. Under Section 2 of the 1979 Contract, the coal to be supplied by WFA was generally to be of a quality which enabled Kansas City to meet Federal Air Quality Standards “without the installation of special sulphur removal equipment.” [Exhibit 109, p. WF 168]. The coal was also to be supplied from Coal Pool Number Two, which was defined in 1997 by a Fourth Amendment to the 1979 Contract:
‘The coal required for operation of Nearman Creek Power Station during the term of this Contract will be supplied from Western Fuels Coal Pool Number Two, which shall consist of coal obtained by Seller pursuant to any other agreements entered into by Seller and approved by Buyer.’
[Exhibit 111, p. WF 188]. Johnson confirmed that Coal Pool Number Two is the supply source to which the Buyer and Seller agreed under the 1979 Contract. [Transcript Vol. II, p. 234].
15. Johnson explained that in practice, WFA went into the marketplace to find a coal supply, and once a supplier was identified, discussed the supplier with Kansas City. [Transcript Vol. I, p. 57]. This typically included an invitation for Kansas City to do a test burn of the proposed coal. [Transcript Vol. I, p. 60]. If Kansas City was satisfied with the proposed supplier, WFA entered into a contract. [Transcript Vol. I, pp. 57, 62].
16. Once WFA secured a supplier, the price paid by Kansas City was the sum of (1) the coal supplier’s price; (2) the costs of transportation arranged by WFA; and (3) an override paid to WFA to defray the expenses of its operations. [Exhibit 109, pp. WF 172-174; Transcript Vol. I, pp. 61-62, 236]. WFA passed the price of the supplier’s coal directly through to its Buyer, Kansas City, keeping only the override. [Transcript Vol. I, p. 61, Vol. II, pp.160, 235-236]. The 1979 Contract describes the Seller’s price to Buyer as being “fixed by the Board of Directors of the Seller.” [Exhibit 109, p. WF 172]. The price must be fixed “at an amount which will produce revenues which will be sufficient, but only sufficient, together with all other revenues Seller receives, to meet all costs incurred by Seller in producing or acquiring and delivering coal from resources in Western Fuels’ Coal Pool Number Two…” [Exhibit 109, p. WF 172].
17. WFA has operated with a 12.5 cent per ton override since 1988. [Transcript Vol. pp. 61, 73, 75; but see Transcript Vol. II, p. 205, where Johnson states 1998]. WFA’s other revenues included interest on the cash account it keeps on hand, a reserve of approximately $4 million, and revenues from the lease of about 1600 railcars. [Transcript Vol. II, pp. 160, 207]. Johnson observed WFA has a disincentive to build excessive cash reserves, because excess reserves would conflict with its mission of providing coal to members at the lowest possible price. [Transcript Vol. I, p. 77].
18. The quantity terms of the 1979 Contract reflected WFA’s reliance on third party suppliers. Section 3 committed the Buyer to estimates of its requirements, with an annual deadline such that “Seller will have revised estimates three years in advance of the actual time of delivery of coal to the Nearman Power Station.” [Exhibit 109, p. WF 169]. Section 4 addressed the consequences of the Buyer taking either more or less coal than scheduled. [Exhibit 109, pp. WF 170-171]. Section 5 obliged the Seller and Buyer to “confer and agree” on details of short range delivery schedules. [Exhibit 109, pp. WF 171-172].
19. The Department directed the Board’s attention [Transcript Vol. III, p. 486] to a contractual limit on the Buyer’s obligations to pay Seller:
The obligation of Buyer to make any payments under this Contract shall be limited to the obligation to make payments from revenues derived from the municipal electric system operated by Buyer (the “Buyer’s system”) and available reserves of Buyer’s System. Coal to be delivered by Seller to Buyer hereunder is for use by Buyer in its operations of Buyer’s System and all payments required to be made by Buyer for coal pursuant to this Contract shall constitute operation and maintenance expenses of Buyer’s System. Buyer shall not be obligated to levy any taxes, general or specific, for the purpose of paying any amount under this contract.
[Exhibit 109, p. 178; Transcript Vol. II, p. 212]. According to Johnson, this limitation may reflect requirements of Kansas City’s own rules and regulations, or statute. [Transcript Vol. II, p. 213]. We find this to be a reasonable explanation of the source of the provision.
20. The Department also called the Board’s attention to Section 9 of the 1979 Contract, regarding Assignments. [Transcript Vol. III, pp. 544-546]. We find that Johnson has correctly summarized the Assignments provision. [Transcript Vol. II, p. 214]. Neither party may assign the Contract without the prior written consent of the other party. [Exhibit 109, p. WF 178]. However, the Seller may assign the Buyer’s obligation to pay the Seller’s fixed costs. [Exhibit 109, p. WF 179]. This afforded WFA a means to provide collateral to coal car vendors. [Transcript Vol. II, p. 214].
C. Western Fuels - Wyoming, Inc. and the Dry Fork Mine
21. WFW was incorporated under Wyoming’s business corporations law on February 13, 1989. [Exhibit 510; Transcript Vol. I, p. 67]. By action of law, its affairs are now governed by the Wyoming Business Corporation Act, which became effective January 1, 1990. Wyo. Stat. Ann. § 17-16-1801 et seq.; Session Laws of Wyoming, 1989, Chapter 249, Section 6. WFW is a for-profit corporation. [Transcript Vol. I, p. 66, Vol. II, p. 226]. Rex Johnson is corporate counsel for WFW. [Transcript Vol. I, p.67].
22. Besides Johnson, WFW called two other witnesses with knowledge of the background
of WFW and its principal business and asset, an interest in the Dry Fork Mine. [Transcript
Vol I, pp. 66-67, 137-138, Vol. II, p. 211]. Darold Koch joined Dry Fork in 1990, and was
its chief accountant until 1997, when he became acting mine manager. [Transcript Vol. II,
p. 254]. Koch remained acting mine manager until April 2000; at that time, Koch became
business manager, and Brad Hanson took over as mine manager. [Transcript Vol. II, pp.
254-255]; see infra, ¶¶66,86, 88, 90. In April, 2005, Koch moved to Denver to become vice
president of finance and administration for WFA. [Transcript Vol. II, pp. 253, 256].
23. Claire Olsen has been employed by Basin Electric Power Cooperative (Basin) since 1975, and as its general counsel for about six years. [Transcript Vol. III, pp. 371-372]. Beginning in 1975, Olsen had responsibilities for aspects of Laramie River Station, a three-unit power plant for which Basin is the project manager. [Transcript Vol. III, pp. 375, 385, 395, 404].
24. The Dry Fork Mine started as a project to supply a long-term source of fuel to the Laramie River Station power plant. The concept was to provide six Laramie River Station equity participants with some control over mining costs, and to provide a hedge against the market. [Transcript Vol. II, p. 257]. The six participants were Basin; Tri-State Generation and Transmission; Lincoln Electric Systems; Missouri River Energy Services; Wyoming Municipal Power Agency; and Heartland. [Exhibit 126; see Transcript Vol. I, p. 14]. We recap the comparative membership of WFA and the Laramie River Station owners as follows:
Class A members of WFA and owners of Laramie River Station: Basin; Tri-State Generation and Transmission.
Class A or Class B members of WFA but not owners of Laramie River Station: Sunflower Electric; Kansas City; the Southern Municipal Power Agency of Rochester, Minnesota; and the City of Sikeston, Missouri.
Owners of Laramie River Station but not Class A or Class B members of WFA: Lincoln Electric Systems; Missouri River Energy Services; Wyoming Municipal Power Agency; and Heartland.
[Exhibit 126]; supra, ¶ 10.
25. Basin owns 42.27% of Laramie River Station, and Tri-State owns 24.13%. [Transcript Vol. I, pp. 88-89, Vol. II, p. 250]. Together, Basin (with two) and Tri-State (with four) also select six of the eleven Directors of WFA. Supra, ¶ 8.
26. Olsen pointed out that the simplest way to associate the benefits and liabilities of the Dry Fork Mine investment with the Laramie River Station participants was to create WFW as a separate entity. [Transcript Vol. II, p. 381].
27. The Dry Fork Mine was eventually developed as a partnership in which WFW provided capital and North Gillette Coal Company provided coal. [Transcript Vol. I, p. 79]. North Gillette Coal Company controlled all of the Dry Fork coal reserves. [Transcript Vol. II, p. 258]. Most of these reserves were federal; North Gillette was accordingly required to begin production within a limited number of years. [Transcript Vol. II, pp. 258-259]. North Gillette was coming up against the limitation period when it approached WFA to work out a mutually beneficial plan for development. [Transcript Vol. II, p. 259].
28. The six participants in the Laramie River Station invested $30 million in amounts proportionate to their respective percentage interests. [Transcript Vol. I, pp. 79, 89, 116]. The $30 million was provided in the form of a loan. [Transcript Vol. I, p. 79]. The participants loaned the money to WFA, which in turn loaned the money to WFW. [Transcript Vol. III, pp. 380-381]. In light of the participants’ investment, one goal for the structure of WFW was to have the primary participants in the Laramie River Station, Basin and Tri-State, control the affairs of WFW for the benefit of the Laramie River Station participants. [Transcript Vol. I, pp. 78, 89].
29. Article IV of the WFW Articles of Incorporation described two classes of stock: 100 shares of Class “A” Common Stock without par value, and 900 shares of Class “B” Common Stock without par value. [Exhibit 510, pp. 105-106]. All of this stock was originally held by WFA:
Western Fuels Association, Inc., a Wyoming corporation (“WFA”), shall initially be the owner and holder of the one hundred (100) shares of Class “A” stock in the corporation and the nine hundred (900) shares of Class “B” stock in the corporation. WFA may not sell, encumber or otherwise transfer any of such shares without the prior consent of the Board of Directors of the corporation, except that WFA may, without such consent, (i) pledge such shares to Basin Electric Power Cooperative, acting on its own behalf and as operator of the Laramie River Station (“Basin”), as security for notes made by WFA and payable to Basin, and (ii) transfer such shares to Basin to reflect patronage earnings payable to Basin by WFA in connection with the Dry Fork Coal Pool.
[Exhibit 510, p. 106; Transcript Vol. I, p. 68].
30. Article V of the WFW Articles of Incorporation provided that only the owner of Class “A” stock had the right to vote at stockholder meetings. [Exhibit 510, p. 106]. WFW’s by-laws reiterate this exclusive right to vote. [Exhibit 508, Article I, Section 5, p. 72]. WFA has owned the Class “A” stock at all pertinent times. [Transcript Vol. I, p. 89].
31. Article V of the WFW Articles of Incorporation also provided that only the owners of Class “B” stock had the right to receive dividends. [Exhibit 510, p. 106; Transcript Vol. I, p. 89]. Under WFW’s by-laws, the WFW Board of Directors was solely responsible for determining whether “the financial condition of the corporation” warrants declaration of dividends. [Exhibit 508, p. 80].
32. Article XI of the WFW Articles of Incorporation sharply restricted the qualifications for election to WFW’s five-member Board of Directors. The two entities with the largest financial stake in Laramie River Station, and hence the largest corresponding stake in the loan to WFW, control the Board:
Two (2) candidates shall be Basin Electric Power Cooperative’s representatives on the Board of Directors of Western Fuels Association, Inc.;
Two (2) candidates shall be Tri-State Generation and Transmission Association’s representatives on the Board of Directors of Western Fuels Association, Inc.;
One (1) candidate shall be the General Manager of Western Fuels Association, Inc.
[Exhibit 510, p. 107]. Johnson confirmed that WFW’s Basin and Tri-State Directors were on both the WFW and WFA Boards. [Transcript Vol. I, p. 120]. WFW’s by-laws echo its Articles of Incorporation by requiring Basin and Tri-State to each nominate two directors, and one director to be the General Manager of WFA. [Exhibit 508, p. 74]. A director must be “a director or general manager of a cooperative, corporate stockholder of or a contract patron of the corporation.” [Exhibit 508, p. 75].
33. According to Olsen, the role of WFA’s General Manager on the WFW Board was to have someone knowledgeable on all aspects of coal supply in the Powder River Basin. [Transcript Vol. II, p. 390]. We find this testimony credible.
34. Johnson used a diagram to explain the structure of WFW. [Exhibit 126; Transcript Vol. I, pp. 87-88]. His diagram showed WFA as holding all Class “A” voting stock. [Exhibit 126]. The diagram showed dividends being directed to Class “B” stock. The dividends then went to two different recipients. Twenty percent of the dividends went to Basin as Laramie River Station Operator for the Laramie River Station Owners, all of which were listed on the diagram with their respective percentage interests. [Exhibit 126]. The other 80% of dividends went to WFA, then again to Basin as Laramie River Station Operator, by “patronage allocation.” [Exhibit 126]. This WFW patronage allocation was unrelated to the patronage allocations of WFA. [Transcript Vol. II, p. 242].
35. Johnson credibly asserted that Kansas City, as a Class B member of WFA with no interest in the Laramie River Station or WFW, had no right to receive dividends, income, patronage dividends or remuneration from WFW. [Transcript Vol. II, pp. 234-235, 241-242].
36. Johnson and Olsen both assert the economic burdens and benefits of WFW flow to the Laramie River Station participants. [Transcript Vol. I, pp. 68, 70, 89, 165-166, 212, Vol. III, pp. 382-383, 393]. Johnson acknowledged that, as of the time of the hearing, only 20% of the Class “B” stock had been distributed to the Laramie River Station participants. [Transcript Vol. I, p. 89]. He nonetheless insisted the other 80% of dividends flow through WFA to the same Laramie River Station participants by means of “patronage allocations, et cetera.” [Transcript Vol. I, p. 89]. He attributed this path “to the way the financing was set up and the way the tax status was set up.” [Transcript Vol. II, p. 165].
37. Although Johnson could not explain the precise accounting arrangements, he asserted that the handling of the Class “B” stock reflects the mechanism for repayment of up-front capital. [Transcript Vol. II, pp. 241-242]. As WFW delivered coal to Laramie River Station, WFW billed Laramie River Station for an amortized payment on the $30 million loan, together with the cost of coal. [Transcript Vol. I, p. 86]. A line item entitled “Principal Payments” appeared on the billing calculations for the coal price Laramie River Station paid WFW. [Exhibit 502]; see infra, ¶ 85.
38. On balance, the Board finds the economic burdens and benefits of WFW flow to the Laramie River Station participants. The Board would have preferred substantially more documentation, and declines to rest its finding exclusively on the opinions of Johnson and Olsen. In making this finding, the Board relies on the larger context presented in Petitioner’s case, including WFA’s mission and authority, as documented in its Articles and by-laws, and in the 1979 Contract with Kansas City; WFW’s mission and authority; the fact that WFA’s membership and the owners of the Laramie River Station were not identical, nor did the entire WFA membership have an interest in investing in the Dry Fork Mine; the history of the Dry Fork Mine, infra; the investment in WFW and Dry Fork made exclusively by the Laramie River Station participants, rather than by all WFA members, with the related likelihood that an investment transaction would be structured both to place any financial onus on the participants, and to protect the membership of WFA from such onus; and the overall consistency and credibility of Petitioner’s three witnesses.
D. Dry Fork Mine operations before the audit period
39. The Dry Fork Mine shipped its first coal to the Laramie River Station in 1990. [Transcript Vol. II, p. 259, 382]. Laramie River Station was the Mine’s only customer in the immediately following six years, with the exception of one small sale. [Transcript Vol. II, p. 259, 307]. In its first few years of operation, the Dry Fork Mine helped keep down the prices bid to Laramie River Station for coal from other sources. [Transcript Vol. II, p. 258].
40. Under WFW’s contract with WFA to supply the Laramie River Station, Laramie River Station paid only costs, with no profit component. [Transcript Vol. II, p. 308]. WFW makes no profit on Laramie River Station’s contract because the people who own Laramie River Station are all beneficial owners of WFW and the Dry Fork Mine. [Transcript Vol. II, p. 551]. The record includes a spreadsheet showing how the Mine calculated costs for billing to Laramie River Station. [Exhibit 502; Transcript Vol. II, pp. 326-336, 340-341].
41. During these years, WFW did not generally operate Dry Fork at a profit. [Transcript Vol. II, p. 314]. Losses were initially by design, in order to reduce the taxes of North Gillette Coal Company. [Transcript Vol. II, p. 314].
42. During these years, WFW conceded its billings to Laramie River Station coal were not indicative of a market value, and in 1995 reached an agreement with the Department for a method to determine the value of coal shipped to Laramie River Station. [Transcript Vol. II, p. 298].
43. From Basin’s perspective as operator of Laramie River Station, its commitment to Dry Fork coal soon gave rise to quality concerns. [Transcript Vol. II, p. 383]. Dry Fork coal had high ash content and high moisture content. [Transcript Vol. II, p. 383]. Its ash fusion quality was such that Dry Fork coal adhered to the interior parts of the Laramie River Station boilers more than other coals. [Transcript Vol. II, p. 383]. Such adhesion reduced heat transfer, required outage time for cleaning, and required the purchase of replacement power during such outages. [Transcript Vol. II, p. 384].
44. Dry Fork coal was at a general disadvantage in the Powder River Basin market. The projected Btu value of Dry Fork coal was about 8100, with some coal reaching 8140 Btus [Transcript Vol. II, pp. 274, 309], as compared to the 8400 and 8800 Btu coals of competing mines. [Transcript Vol. II, p. 260]. Dry Fork is the only mine in the Powder River Basin which actively tried to market coal with a heat content well below 8400 Btus. [Transcript Vol. II, p 287]. Dry Fork coal also had a relatively high moisture content, and some parts of the Mine had “sulfur problems.” [Transcript Vol. II, p. 260]. These qualities made the coal less competitive in the marketplace, because the power plants which purchase coal are essentially purchasing heat content, and must take into account relatively higher costs for handling, pulverizing, ash disposal, and transportation. [Transcript Vol. II, p. 261].
45. By 1996, 8400 Btu coal was selling for $3 to $3.25 a ton. [Transcript Vol. II, p. 261]. Laramie River Station was purchasing some high sulfur coal from mines other than Dry Fork for $2.65 a ton. [Transcript Vol. II, p. 261]. The average cost of Dry Fork production under its billing formula for Laramie River Station was by this time $3.80 to $3.85 a ton. [Transcript Vol. II, pp. 262, 311]. In Olsen’s words, which we find credible, “Dry Fork was our highest cost fuel at the Laramie River Station and was poorest quality, so this caused a lot of angst among not only the operators, but the participants and owners at the Laramie River Station, also.” [Transcript Vol. II, p. 384].
46. The Laramie River Station participants decided it was cheaper to buy coal on the open market than from Dry Fork, and discussed idling the Mine. [Transcript Vol. II, pp. 262, 387]. The Dry Fork managers did a detailed study of costs, and persuaded the WFW Board it would be cheaper to mine 850,000 tons a year for Laramie River Station than to close the Mine. [Transcript Vol. II, p. 263, 264].
47. Consistent with this plan, on October 23, 1996, Dry Fork reduced its workforce from forty-five to eight. [Transcript Vol. II, p. 263]. The workforce remained at that level for about four years. [Transcript Vol. II, p. 263]. During this period, Koch as mine manager also drove a haul truck. [Transcript Vol. II, p. 254].
48. Kansas City first became involved with the Dry Fork Mine in 1998. Although Laramie River Station was supposed to take the Mine’s output, the issues of coal quality remained. [Transcript Vol. II, p. 264]. During this time, Kansas City was receiving coal from the Rawhide Mine under a contract between WFA and Caballo Coal Company, known as the Peabody Contract. [Transcript Vol. II, p. 264; Exhibit 112, p. WF 190; Exhibit 120, p. WF 235]. The Peabody Contract covered some tons for Laramie River Station, and all tons for Kansas City’s Nearman Creek plant. [Transcript Vol. II, pp. 267, 352]. WFA had negotiated the contract covering two buyers in order to maximize tonnage and secure a lower price for both. [Transcript Vol. II, p. 353].
49. The coal provided under the Peabody contract was of a higher quality than the Dry Fork coal. [Transcript Vol. I, p. 95]. However, Kansas City’s plant was able to handle Dry Fork’s lower quality coal. [Transcript Vol. II, p. 264].
50. On January, 19, 1998, Kansas City and Laramie River Station formally agreed to swap Kansas City’s Rawhide Mine supply for Laramie River Station’s Dry Fork Mine supply. [Transcript Vol. II, p. 264; Exhibit 119, p. WF 233]. The swap agreement was effective until December 31, 2000. [Exhibit 119, p. WF 234].
51. The first year after the swap, Dry Fork mined 1.2 million tons, then 1.1 million tons the next year. [Transcript Vol. II, p. 264]. Although Kansas City remained the Dry Fork’s only substantial customer until 2000, Dry Fork started hiring additional employees late in 1999. [Transcript Vol. II, p. 265]. Dry Fork met with only limited success in getting previous employees to return. [Transcript Vol. II, p. 266]. It became concerned with developing a reputation as an undesirable employer. [Transcript Vol. II, p. 357].
52. The Dry Fork Mine added a new customer in 2000, Pacificorp’s Dave Johnston Plant, which was to take 2.1 million tons of coal. [Transcript Vol. II, p. 265]. However, Dry Fork once again began having quality issues, including difficulty keeping deliveries to Dave Johnston at the contract level of 8150 Btus. [Transcript Vol. II, p. 267].
53. During this same period in 2000, Laramie River Station had become dissatisfied with the price it was paying for coal under the Peabody contract. [Transcript Vol. II, pp. 267, 349, 387]. Over the life of the contract, originally executed in 1979 [Transcript Vol. II, pp. 352-353; Exhibit 119, p. WF 233], Laramie River Station’s price had diverged unfavorably from that of Kansas City, because the periods of price reopening were different for the two plants. [Transcript Vol. II, pp. 353]. Laramie River Station’s price rose higher than either Laramie River Station or WFA “felt comfortable with.” [Transcript Vol. II, p. 349]. In contrast, Kansas City was satisfied with its price. [Transcript Vol. II, p. 267].
54. Peabody would only agree to termination of the contract for both plants at once. [Transcript Vol. II, pp. 267, 349]. This eventually led to a deal by which Dry Fork supplied coal to Kansas City, and Laramie River Station entered the marketplace in search of a better price for the portion of its supplies which the Peabody contract had provided. [Transcript Vol. II, p. 268].
55. According to Koch, the price WFW offered to Kansas City for Dry Fork coal related directly to meeting the economic standard set by Kansas City’s price under the Peabody contract. Kansas City had no reason to accept a price higher than the one it already enjoyed. [Transcript Vol. II, pp. 269-270]. Koch demonstrated this equivalency with the following arithmetic, based on a document originally prepared by WFA:
Begin with the July 2000 Peabody price of $3.10 for 8325 Btu coal;
Add the Peabody price to the per-ton rail rate of $8.464 for delivery to Kansas City;
Divide by 8325 to get a cost per Btu;
Multiply that result by 8100, representing the Dry Fork coal Btus;
Subtract the rail rate from the result to reach a per-ton equivalent of about $2.795;
Reduce the resulting price by 9 cents per ton as a sulfur penalty;
Escalate that result by 1.25% to represent an annualized adjustment.
[Transcript Vol. II, pp. 271-272; Exhibit 125]. The end result is approximately $2.74, or the initial price in the eventual contract between WFW and Kansas City. [Transcript Vol. II, pp. 271-275].
56. Although this price was not enough to generate profit for WFW, it was enough to generate positive cash flow. [Transcript Vol. III, pp. 339, 551]. The Mine was constantly scrutinizing cash costs, and its projections consistently showed that a budget which included the mining of tons over and above those taken by Laramie River Station resulted in less cost to Laramie River Station. [Transcript Vol. II, pp. 289, 362-365].
57. The Mine management also intended to selectively mine Dry Fork’s four coal seams to improve the quality of coal shipped to Laramie River Station. [Transcript Vol. I, p. 100; Transcript Vol. II, pp. 249, 310-311, 358-359]. Dry Fork operated in two pits, south and east. [Transcript Vol. II, pp. 310-311]. The south pit was located near a sand channel which caused quality problems. [Transcript Vol. II, p. 310]. The east pit had four separate zones, identified as C-1 through C-4. [Transcript Vol. II, p. 311]. C-1 was the lowest of these four zones, the most likely to be saturated with water, and therefore of the lowest quality. [Transcript Vol. II, pp. 310-311]. C-4 was the highest zone, the most likely to be exposed on the surface, and therefore of lesser quality than zones C-2 and C-3. [Transcript Vol. II, pp. 311, 358]. The Mine tried to supply Kansas City from the south pit and from east pit zones C-1 and C-4 – “junk coal” – leaving the better quality coal in zones C-2 and C-3 to supply Laramie River Station. [Transcript Vol. II, pp. 247, 311, 359]. This approach was implemented after WFW entered into a contract with Kansas City, but the concept was eventually abandoned because it proved to be too costly. [Transcript Vol. II, pp. 359-360].
58. Taken as a whole, Johnson’s analysis of the countervailing interests of Kansas City and Laramie River Station is persuasive. The Laramie River Station owners had an interest in finding someone to buy the junk coal, both to improve the quality of shipments to Laramie River Station and to increase the overall volume of the Mine. [Transcript Vol. II, pp. 246-250]. Kansas City was willing to buy lower quality coal, but wanted it priced accordingly. [Transcript Vol. I, pp. 248, 250].
59. As background, Koch also provided credible insight into the anxiety and motivations of the Mine’s management and operating personnel, as distinct from the WFW Board of Directors. In 2000, there were renewed discussions about idling the Mine. [Transcript Vol. II, p. 268]. “From the mine’s viewpoint, we needed a contract and we needed it bad to see the mine survive.” [Transcript Vol. II, p. 268]. The managers were particularly concerned about Dry Fork’s reputation as a stable employer, and its ability to recruit quality personnel. [Transcript Vol. II, pp. 268-269, 357]. From the standpoint of those involved with the daily operation of Dry Fork, the Kansas City volume represented an opportunity to stay in business while waiting for better economic conditions. [Transcript Vol. II, p. 357].
60. At the time of the hearing of this matter, Koch presented evidence to support the view that the Kansas City coal price was in line with the market for Powder River Basin coal in 2000. [Transcript Vol. II, pp. 276-285; Exhibit 123]. Koch reviewed prices for 8800 Btu and 8400 Btu Powder River Basin coal spot sales, as estimated weekly by Argus Coal Daily, then plotted the prices for 2000, 2001, and 2002. [Transcript Vol. II, pp. 276-277]. Since there was no published market data for 8100 Btu coal, and there was an eighty-cent difference between 8800 Btu and 8400 Btu coal, Koch made a proportionate downward adjustment of sixty-six cents from the price of 8400 Btu coal to reach an extrapolated price of $2.71 a ton for 8100 Btu coal in July, 2000. [Transcript Vol. II, pp. 278-285]. Based on this calculation, he considered the price to which WFW and Kansas City agreed to be representative of a market price for 8100 Btu coal. [Transcript Vol. II, p. 285]. While the four-year term of the Kansas City contract is longer than the term associated with spot coal, and may accordingly understate an appropriate market value for coal sold on a four-year basis, Koch’s analysis nonetheless had the virtue of being grounded in objective, publicly available data. For that reason, we find it to be generally credible.
61. In 2000, WFW bought out the Dry Fork Mine interest of its partner, North Gillette Coal Company. [Transcript Vol. I, p. 113].
E. The December 5, 2000, contract between WFW and Kansas City
62. On December 5, 2000, Kansas City entered into two letter agreements, one with WFW on Western Fuels - Wyoming Inc. letterhead, [Exhibit 112], and one with WFA on Western Fuels Association Inc. letterhead. [Exhibit 120]. Both letter agreements were signed by Fred Palmer, who was identified as “General Manager” of WFW in its agreement, and also as “General Manager” of WFA in its agreement. [Exhibits 112, 120; Transcript Vol. I, p. 192]. The street address on both letters was Palmer’s. [Transcript Vol. I, p. 179]. Palmer was WFA’s Chief Executive Officer at the time, with an office in Washington, D. C. [Transcript Vol. I, p. 110], and a member of the Board of Directors of WFW. [Transcript Vol. I, pp. 119, 178]; supra, ¶¶ 32-33.
63. Using essentially the same language, both letter agreements recognized (1) the Peabody Contract, overlain by the 1998 swap agreement which was to expire on December 31, 2000 [Exhibit 119], supra, ¶¶ 48-50, and (2) the determination of WFA and Caballo Coal Company to terminate the Peabody Contract effective February 28, 2001. [Exhibit 112, p. WF 190; Exhibit 120, p. WF 235]. Both letter agreements also provided for an extension of the 1998 swap agreement to February 28, 2001. [Exhibit 112, p. WF 190; Exhibit 120, p. WF 236].
64. The WFW agreement with Kansas City provided for a four-year term, with prices specified for each contract year, beginning at $2.74 for the First Contract Year. [Exhibit 112, p. WF 191]; see supra, ¶ 55. The price was to be adjusted monthly, based on variance from heat content of 8100 Btus, and variation in sulfur dioxide content. [Exhibit 112, p. WF 191]. The minimum monthly average heat content was to be 8050 Btus; the maximum trainload sulfur dioxide was to be 1.2 lb/MMBtu. [Exhibit 112, p. WF 191]. The annual quantity was to be from 840,000 to 1,200,000 tons per year, pursuant to notice from Kansas City to WFW sixty days before the start of each contract year. [Exhibit 112, p. WF 190].
65. The WFW agreement with Kansas City recognized a specific continuing role for WFA: “WFA will arrange transportation on behalf of KCBPU [i.e., Kansas City] and otherwise act on behalf of KCBPU in administering the coal supply arrangements.” [Exhibit 112, p. WF 191].
66. Neither Johnson, nor Olsen, nor Koch were directly involved in negotiation of the contract between WFW and Kansas City. [Transcript Vol. II, pp. 168-169, 347, 388]. According to Johnson, WFW’s representatives would have included Fred Palmer, supra, ¶ 62, and mine manager Brad Hanson, supra, ¶ 22. [Transcript Vol. II, p. 245].
67. Johnson, outside counsel for WFW, supra, ¶ 21, was involved in the action taken by the WFW Board of Directors to approve the contract. [Transcript Vol. I, p. 90].
68. The contract between WFW and Kansas City was not presented to the WFA Board of Directors for its approval. [Transcript Vol. III, p. 553].
F. The December 5, 2000, agreement between WFA and Kansas City
69. The WFA agreement with Kansas City referred to the Amended and Restated Coal Purchase Contract between them, dated December 18, 1979, together with its Second, Third, and Fourth Amendments, as “the Coal Purchase Contract.” [Exhibit 120, p. WF 235]; see supra, ¶¶ 13-20. WFA and Kansas City recognized the “new agreement governing coal supplies from WFW to KCBPU from the Dry Fork Mine,” and recited their desire “that WFA administer the contract relationship between WFW and KCBPU under the terms of the Coal Purchase Contract.” [Exhibit 120, p. WF 235].
70. WFA and Kansas City agreed the coal supplied by WFW would constitute coal from Coal Pool Number Two, thereby satisfying the parties’ respective obligations to supply and purchase coal under the Coal Purchase Contract. [Exhibit 120, p. WF 236]. Johnson notes this aspect of the agreement also reflected Kansas City’s approval of the coal source, as required under the Coal Purchase Contract. [Transcript Vol. II, p. 192]; supra, ¶ 14-15.
71. WFA was to arrange transport for coal supplied by WFW under the Coal Purchase Contract. [Exhibit 120, p. WF 236]. WFA therefore invoiced rail costs to Kansas City. [Transcript Vol. II, pp. 256-257]. However, the price of WFW coal was to be invoiced directly by WFW to Kansas City. [Exhibit 120, p. WF 236]. Koch confirmed WFW did so in practice. [Transcript Vol. II, p. 256; but see Johnson’s contrary testimony, Transcript Vol. I, p. 72]. The Board finds Koch’s knowledge superior to Johnson’s on this point.
72. The term of the agreement between WFA and Kansas City coincided with the February 28, 2005, termination date of the contract between WFW and Kansas City. [Exhibit 120, p. WF 236]. The contract between WFA and Kansas City acknowledged Kansas City’s right to terminate the WFW contract if Kansas City “experiences operational difficulties with the Dry Fork coal,” in which event WFA would be responsible for arranging alternative coal supplies. [Exhibit 120, p. WF 236].
73. Johnson fairly characterized the agreement between WFA and Kansas City as closing the loop between the pre-existing all requirements1979 Coal Purchase Contract and the agreement between WFW and Kansas City. [Transcript Vol. I, p. 93]. Standing entirely on its own, the agreement between WFW and Kansas City would have been a breach of the Coal Purchase Contract between WFA and Kansas City. [Transcript Vol. II, p. 170].
G. Why WFW believes the WFW contract was arm’s-length
74. Johnson summarized the grounds for his position that the contract between WFW and Kansas City was arm’s-length: WFW and Kansas City were both sophisticated, well informed, and prudent operators; Kansas City was interested in a low price for coal, WFW was interested in the highest price it could get; Kansas City had no ability to leverage WFW, and vice-versa; the WFA Board could not force the WFW Board to agree to a Kansas City contract, largely because the WFW Board owed its fiduciary duty to the Laramie River Station project participants. [Transcript Vol. I, pp. 100-102].
75. Olsen made similar points, emphasizing the perspective of Basin Electric. Basin favored the contract because more tons of production translated into cost savings for Laramie River Station. [Transcript Vol. II, p. 388]. Kansas City had no mechanism to compel WFW to enter into the contract [Transcript Vol. II, p. 389], nor could WFA direct WFW to enter into a contract with Kansas City. [Transcript Vol. II, p. 390]. Basin was comfortable with the marginal pricing of the Kansas City contract, because such pricing was familiar to Basin in the context of pricing electricity. [Transcript Vol. II, p. 391]. Any benefits from the contract between Kansas City and WFW flowed to the Laramie River Station participants, rather than to WFA. [Transcript Vol. II, p. 393].
76. Olsen and Koch also defended the pricing of the contract between WFW and Kansas City. According to Olsen, the Kansas City contract was:
…the best deal you could cook at the time. There was nobody running to Western Fuels-Wyoming saying please sell me coal out of Dry Fork Mine. We were – the mine folks and Western Fuels and the marketing people were out trying to peddle it, but nobody was beating our door down to buy it.
[Transcript Vol. II, p. 389]. Koch did an analysis in 2004 which confirmed that the Kansas City contract price recovered Dry Fork’s cost for production of Kansas City coal, and contributed to a small margin of profit. [Transcript Vol. II, pp. 287-288].
77. Like Olsen, Johnson testified WFW “had diligently and eagerly tried to market coal from the Dry Fork Mine.” [Transcript Vol. I, pp. 99-100].
78. The Board commonly faces circumstances in which it must weigh the credibility of witnesses who are called to articulate the position of their employers. E. g., Union Pacific Resources Company et al, Docket No. 2000-147 et al., June 9, 2003, 2003 WL 21774603 (Wyo. St. Bd. Eq.), ¶¶ 34-40. “[W]here witnesses are plainly advocates for the cause of their employers, testimony can....fall short of ‘the type of evidence commonly relied upon by reasonably prudent men in the conduct of their serious affairs.’ Wyo. Stat. Ann. §16-3-108(a).” Id., ¶ 35. While reserving judgment on the ultimate question of fact, i.e., whether or not the agreement between Kansas City and WFW is arm’s-length, we find Johnson, Olsen, and Koch to generally be credible witnesses, for four principal reasons.
79. First, their testimony concerning corporate structure is supported by pertinent documentation in the form of articles of incorporation and by-laws.
80. Second, the Board is persuaded that the participants in the Laramie River Station bore the economic risk of the success or failure of the Dry Fork Mine, and with it, the success or failure of WFW. Kansas City had no such stake in the success or failure of the Dry Fork Mine. The Laramie River Station participants were also represented on the WFW Board of Directors in sufficient strength to make policy choices to protect their investment, including but not limited to marginal pricing.
81. Third, the financial resources of WFA are not derived from the profitability of contracts it has entered into with its members, but rather from the override fees associated with those contracts, plus ancillary revenue from cash on hand and fees related to rail cars. Given WFA’s all requirements contract with Kansas City [Exhibit 109], and the parties’ recognition that WFA would find another supplier for Kansas City if coal from the Dry Fork Mine proved unacceptable [Exhibit 120], Kansas City would continue to pay override fees to WFA whether or not the Dry Fork Mine supplied coal for Kansas City’s Nearman Station. WFA’s economic survival was not linked to the survival of the Dry Fork Mine or WFW.
82. Fourth, Koch fairly summarized contemporary spot coal market data from an impartial source which supports the explanation of events offered by the three witnesses. Supra, ¶ 60.
H. Dry Fork Mine operations during the audit period
83. Prices for coal increased dramatically in the early part of 2001, then dropped off somewhat after June. [Transcript Vol. II, p. 286; Exhibit 123]. In late May, 2001, WFW entered into a six-month contract with PacifiCorp to supply a base quantity of 440,000 tons of coal at $7 per ton. [Exhibit 113; Transcript Vol. II, p. 291].
84. In response to a question from the Department’s counsel, Koch responded that WFW viewed Kansas City and PacifiCorp as customers without ties to WFW, and to whom WFW sales were arm’s-length. [Transcript Vol. II, p. 323]. Koch did not view Kansas City’s representation on the WFA Board of Directors or Kansas City’s all requirements contract with WFA as grounds for distinguishing Kansas City from PacifiCorp. [Transcript Vol. II, p. 306].
85. Koch estimated WFW’s costs per ton to be “somewhere in the five to $6 range” during production years 2001 and 2002 [Transcript Vol. III, p. 314], but with the aid of a document, he made more precise estimates. From a WFW spreadsheet used in 2001 for billing the Laramie River Station participants, WFW costs per ton before taxes and royalties were $3.2279. [Exhibit 502, p. 01, line entitled “Cost/Ton before Taxes”]. Koch testified that the spreadsheet was incomplete because certain tax and royalty entries were not yet closed. [Transcript Vol. III, pp. 332-334]. He estimated that a final cost per ton including taxes and royalties would be between $4.25 and $4.50. [Transcript Vol. III, p. 336]. The spreadsheet itself showed billable costs per ton to Laramie River Station for 2001 as $4.327. [Exhibit 502, p. 01, sixth numerical entry from the bottom; Transcript Vol. III, p. 337]. The billable costs included line items for Depreciation, Depletion, and Amortization, and for Principal Payments. [Exhibit 502, p. 01].
86. A similar spreadsheet for production year 2002 shows WFW costs per ton before taxes and royalties to be $3.0444, and billable costs per ton to Laramie River Station to be $4.389. [Exhibit 502, p. 02].
87. During the audit period, WFA claimed overall management of the Dry Fork Mine, while acknowledging WFW’s ownership. [Exhibit 511, pp. 114-115; Transcript Vol. II, p. 228]. However, the record is not entirely clear concerning the actual scope of services WFA performed for WFW. For example, Koch stated that all accounting for WFW was performed at the mine site. [Transcript Vol. II, p. 257; but see Transcript Vol. II, p. 167]. The Mine’s General Manager in Gillette, Brad Hanson, was responsible for overseeing the Mine’s employees and all facets of the mine operation, including where mining took place and budgeting. [Transcript Vol. II, P. 243]. WFW personnel also prepared information for regulators.
88. On April 9, 2001, Beth Goodnough, a Senior Engineer for WFW, submitted an annual report for the Dry Fork Mine to the Wyoming Department of Environmental Quality for the period February 1, 2000, to January 31, 2001. [Exhibit 505, pp. 42-43]. This report identified the permittee as WFW and its General Manager as Brad Hanson, both with an address in Gillette, Wyoming. [Exhibit 505, p. 46]. In response to a question about changes in corporate structure, the annual report stated:
The ownership of the Dry Fork Mine was changed during the report period. Western Fuels-Wyoming, Inc now owns and operates the Dry Fork Mine. Western Fuels Association controls Western Fuels-Wyoming, Inc.
[Exhibit 505, p. 46]. The first two sentences referred to WFW’s buyout of North Gillette Coal Company. [Transcript Vol. II, p. 251]; supra, ¶ 61. The statement about WFA control of WFW is reiterated at the beginning a table of officers and directors: “Western Fuels Association controls Western-Fuels Wyoming, Inc. which owns and operates the Dry Fork Mine.” [Exhibit 505, p. 48]. The annual report goes on to list Robert P. Norrgard as General Manager of both WFA and WFW, and several individuals were listed as directors of both companies. [Exhibit 505, pp. 48-51].
89. No party introduced Dry Fork’s annual report to the Wyoming Department of Environmental Quality for the period February 1, 2001 to January 31, 2002.
90. On March 28, 2003, Beth Goodnough submitted an annual report for the Dry Fork Mine to the Wyoming Department of Environmental Quality for the period February 1, 2002 to January 31, 2003. [Exhibit 507, pp. 62-63]. Brad Hanson was again identified as General Manager, with an address in Gillette, Wyoming. [Exhibit 507, p. 66]. The statement about WFA control of WFW was reiterated at the beginning a table of officers and directors: “Western Fuels Association controls Western-Fuels Wyoming, Inc. which owns and operates the Dry Fork Mine.” [Exhibit 507, p. 68]. The annual report again listed Robert P. Norrgard as General Manager of both WFA and WFW, and several individuals were again listed as directors of both companies. [Exhibit 507, pp. 68-71].
91. The record includes WFA’s annual reports to its members for the years ending December 31, 2001, and December 31, 2002. [Exhibits 503, 504]. Both annual reports include consolidated financial statements which appear to include WFW assets on the balance sheet. [Exhibit 503, pp. 15-16; Exhibit 504, pp. 35-36; Transcript Vol. II, pp. 154, 293-294]. Johnson correctly pointed out that WFA is not a publicly traded company. [Transcript Vol. II, p. 152]. He credibly asserted that the purpose of the annual reports was to distribute information on WFA’s activities to its members, who in turn distributed the information to their members. For example, Basin has one hundred twenty distribution co-ops, and Tri-State has forty four. [Transcript Vol. II, p. 152]. There is no indication the consolidated financial statements were used for tax or audit purposes. [Transcript Vol. II, p. 153].
92. Koch prepared WFW’s annual state mineral tax reports for production years 2001 [Exhibit 114] and 2002 [Exhibit 115]. In both annual reports, when he reported taxable value, he treated the agreement between WFW and Kansas City as an arm’s-length agreement. [Transcript Vol. II, pp. 305-306]. He accordingly used the sale price of the coal as the basis for reporting its taxable value. [E.g., Exhibit 115, p. WF 213].
93. In contrast, Koch reported sales of coal to Laramie River Station by using an alternative valuation method – average sales price of coal purchased by Laramie River Station from sources other than the Dry Fork Mine – to which the Department had originally agreed in 1995. [Transcript Vol. II, p. 304]; supra, ¶ 42. The Department approved the same alternative valuation method for production year 2001 by letter of April 26, 2002. [Exhibit 108; Transcript Vol. II, p. 304].
I. The audit
94. WFW called James Detheridge II to testify in its case. [Transcript Vol. III, pp. 412 et seq.]. At the time of the hearing, Detheridge had been an auditor with the Department of Audit for fifteen years. [Transcript Vol. III, p. 412]. He performed the audit which is the subject of this appeal. [Transcript Vol. III, p. 412].
95. The Department of Audit’s Final Issue Letter found WFW produced and sold to Kansas City 1,069,101 tons of coal in production year 2001, and produced and sold to Kansas City 1,058,871 tons of coal in production year 2002. [Exhibit 100, pp. WF 08-WF 09].
96. The auditors did not question whether WFW’s agreement with Kansas City was a bona fide arm’s-length contract until a late stage of the audit. The Department of Audit did not mention the problem in its Preliminary Issue Letter of August 24, 2005. [Exhibit 102]. Nor had the issue been raised in a prior audit for production years 1997 through 2000. [Transcript Vol. III, p. 413]. WFW’s response to the Preliminary Issue Letter, dated October 31, 2005, accordingly did not address the issue. [Exhibit 103].
97. Detheridge was prompted to introduce the issue because, after preparing the Department’s preliminary findings, he performed a federal royalties audit of WFW. [Transcript Vol. III, p. 414; Exhibit 104]. Detheridge learned WFW had requested a federal royalty rate reduction from the Bureau of Land Management on the grounds it was not making money. [Transcript Vol. III, pp. 414, 436, 447]. In response, the Bureau of Land Management had prepared a study in which it identified the contract between Kansas City and WFW as not being arm’s-length. [Transcript Vol. III, p. 414]. Prior to reading the study, Detheridge had been unaware of any relationship between WFA and Kansas City. [Transcript Vol. III, p. 437].
98. Detheridge was also concerned that WFW never seemed to make a profit. [Transcript Vol. III, p. 421]. Since Laramie River Station was only taking about half of the Dry Fork coal, he suspected that the coal was being dumped rather than sold for a competitive price. [Transcript Vol. III, pp. 421-423].
99. Representatives of the Departments of Audit and Revenue met with Koch and WFW’s controller, Meri Reidt, on November 22, 2005, to discuss the Preliminary Issue Letter. [Transcript Vol. III, pp. 415, 438, 446]. Detheridge and his supervisor, Derek Weekly, attended on behalf of the Department of Audit, and Matt Sachse, Valuation Manager, represented the Department of Revenue. [Exhibit 104, p. WF 53].
100. The Department of Audit chose to raise the arm’s-length issue for the first time at the November 22 meeting. [Transcript Vol. III, p. 449]. Detheridge recalled that Koch became upset. [Transcript Vol. III, p. 439]. When Koch started to explain the history of WFW’s agreement with Kansas City, the auditors asked about WFW’s profitability, and asked whether Koch had any information to prove the contract was an arm’s-length sale. [Transcript Vol. III, p. 439].
101. Koch responded with an explanation that turned on the distinction between Class A and Class B directors of WFA. [Transcript Vol. III, p. 439]. The auditors replied that they couldn’t understand why a sale from WFW to a Class A member of WFA would not be arm’s-length, but a sale to a Class B member of WFA would. [Transcript Vol. III, p. 443]. Regarding the Class A members, the Board understands the auditors to be referring to WFW sales to Laramie River Station, and to entities directly related to Basin Electric. [Transcript Vol. III, pp. 415, 428]; see supra, ¶ 42, regarding valuation of sales to Laramie River Station.
102. There was no discussion of statutory requirements at the meeting. [Transcript Vol. III, p. 440].
103. “Right after the meeting,” believing “our position was reinforced,” the auditors met with Sachse. [Transcript Vol. III, p. 451]. Because Koch “didn’t tell us at the meeting he was going to provide any additional documentation,” the officials of the two departments “didn’t see why we couldn’t make a decision at that time,” and accordingly decided that the issue was closed. [Transcript Vol. III, pp. 451-452]. The Department of Audit memorialized this decision in a Revised Preliminary Issue Letter dated December 9, 2005. [Exhibit 104]. The letter suggests the Department of Audit had in fact reached a decision prior to the November 22 meeting:
The Department of Audit received Wyoming Fuels, Wyoming’s [sic] (WFW) response to the preliminary findings that disputed some allocations of the expenses, some volumes, and non-arm’s length pricing. WFW requested a meeting concerning these issues about two weeks after the letter arrived. Between the time this meeting was scheduled and this meeting took place, it was discovered by the auditor (while completing the Federal Royalty audit on this property) that Kansas City Board of Public Utilities (KCBPU), a WFW customer was not an arm’s length sale. It was treated as an arm’s length sale in the preliminary findings of the tax audit. It was decided that this would need to be changed in future versions of the audit and have to be discussed in the upcoming meeting with WFW. This meeting took place November 22, 2005.…
[Exhibit 104, p. WF 53, (emphasis supplied)]. There is nothing provisional about the language of the letter, which recites that the auditor had made a discovery, a decision had been made based on the discovery, and the issue was “to be discussed” in the upcoming meeting.
104. The value the two Departments decided to use for Kansas City coal was the same alternative value used for Laramie River Station coal. [Transcript Vol. III, pp. 444-445; Exhibit 104, p. WF 53]; supra, ¶ 42. In reaching this decision, the auditors reasonably concluded short-term sales which occurred during the 2001 price spike, such as the sale to PacifiCorp for six months at $7 per ton, were not comparable to the Kansas City contract. [Transcript Vol. III, pp. 444-445].
105. Although Detheridge stated “we were still open to trying to understand the Kansas City situation” during the meeting on November 22 [Transcript Vol. III, p. 450], the auditors’ actions suggest the contrary. The state officials surprised Petitioner on November 22 with a significant issue and were comfortable reaching a final decision promptly after WFW left the meeting. The Department of Audit’s revised findings of December 9 state their decision was made before the November 22 meeting. Supra, ¶ 103. The auditors never provided WFW a copy of the Bureau of Land Management study which was the basis for Detheridge’s change of position. [Transcript Vol. III, pp. 414, 448].
106. On December 22, 2005, the Department of Audit sent a letter to Koch at the Dry Fork Mine stating its conclusion that WFW had underpaid its federal mineral royalties. [Exhibit 105]. The characterization of facts in this letter echoed the statements in the revised tax audit letter of December 9:
…The preliminary determination resulted from a combination of reading the sales contract and from the BLM study relating to Western Fuels, Wyoming’s request for a reduced federal royalty rate. Most of Western Fuels, Wyoming (WFW) sales are considered non-arm’s length sales. Each of these non-arm’s length sales are to members of the Western Fuels Association (WFA) and have voting rights on the board of directors. Basin Electric has two board members (Class A member), Kansas City Board of Public Utilities (KCBPU) has one board member (Class B member). In the tax audit, coal sold to WFA from auditee, WFW was priced by using an average price for Laramie River Station (WFW sales) from other mines in the basin (adjusted for BTU). This price seemed reasonable and it was decided to use this price for Basin Electric in 2001 and KCBPU and WFA throughout the audit.…
[Exhibit 105, p. WF 62]. The letter refers to the federal regulation which provides for valuation of coal which is not sold pursuant to an arm’s-length contract. [Exhibit 105, pp. WF 61-62]. The letter does not explain why Kansas City’s one member on the WFA Board obliged the auditors to conclude the contract between WFW and Kansas City was not arm’s-length.
107. A common feature of the letters of December 9 and December 22 is the absence of any reasoned analysis for the auditors’ conclusion that the contract between WFW and Kansas City is not arm’s-length. [Exhibit 104, p. WF 53; Exhibit 105, p. WF 62]. In both letters, the auditors made a pronouncement without providing an explanation. Further, the statutes and regulations governing federal royalties are not the same as the statutes and rules governing Wyoming taxation. The correspondence falls short of explaining why the same result is appropriate under the different regimes.
108. The Board commonly defers to auditor judgment, e.g., Williams Production RMT Company, Docket 2002-103, November 14, 2003, 2003 WL 22754175, ¶ 43 (Wyo. St. Bd. Eq.), but when doing so, must satisfy itself concerning the factual and logical premises of that judgment. The Board accordingly turned to the testimony of Detheridge for an explanation.
109. Detheridge stated that Kansas City’s WFA board member caused concern “because on the tax side…it’s about affiliation and not control.” [Transcript Vol. III, p. 417]. He nonetheless conceded that there is no definition of “affiliation” under the Wyoming statutes. [Transcript Vol. III, p. 417].
110. On prompting from WFW counsel, Detheridge stated he relied on the statutory definition of bona fide arm’s-length sale, and initially rephrased his concern to be whether there was reasonable exposure in the competitive market, and whether there was adverse economic interest. [Transcript Vol. III, p. 418]. Detheridge then specifically associated his concern for affiliation with adverse economic interest alone. [Transcript Vol. III, p. 419]. When asked about how the relationship between Kansas City and WFA implicated economic interests, Detheridge replied with a vague reference to “the whole co-op setup and the setup of the board, and they have a member on the board, along those lines.” [Transcript Vol. III, p. 419].
111. The Board finds Detheridge did not provide a persuasive explanation of his concern for affiliation. His explanation in fact suggests substantial confusion concerning federal royalty and state tax standards, since affiliation is expressly referenced in the pertinent federal definition:
Arm’s-length contract means a contract or agreement that has been arrived at in the marketplace between independent, nonaffiliated persons with opposing economic interests regarding that contract. For purposes of this subpart, two persons are affiliated if one person controls, is controlled by, or is under common control with another person. For purposes of this subpart, based on the instruments of ownership of the voting securities of an entity, or based on other forms of ownership: ownership in excess of 50 percent constitutes control; ownership of 10 through 50 percent creates a presumption of control; and ownership of less than 10 percent creates a presumption of noncontrol which MMS [the United States Department of the Interior’s Minerals Management Service] may rebut if it demonstrates actual or legal control, including the existence of interlocking directorates….
30 C.F.R. § 206.451. [Exhibit 122, p. WF 244].
112. Although the federal definition of arm’s-length contract employs the concept of affiliation, Detheridge correctly pointed out that with the Minerals Management Service, “it’s more of a control issue.” [Transcript Vol. III, p. 417]. The Department plainly believes that control is an important consideration. In its cross-examination of Johnson, the Department’s attorney stressed representations in annual reports prepared for the Department of Environmental Quality, that “Western Fuels Association controls Western Fuels-Wyoming, Inc., which owns and operates the Dry Fork Mine.” Supra, ¶¶ 88, 90. However, at no time during Petitioner’s case did the Department establish how control in the context of environmental regulation established the absence of adverse economic interests between Kansas City and WFW.
113. We find that the Department and the auditors are unpersuasive on the issue of control. Detheridge focused on the relationship between WFA and WFW, rather than on the relationship between Kansas City and WFW, who were the parties to the contract at issue. [Transcript Vol. III, pp. 425-426]. If we apply the federal definition of arm’s-length contract for the sake of illustration, an exercise which the auditors presumably conducted when auditing federal royalties, the distinction becomes apparent.
114. From the face of the federal definition, with its emphasis on percentages of ownership, supra, ¶ 111, there is a presumption of “noncontrol” between Kansas City and either WFW or WFA. Kansas City owns less than 10 percent of WFA, viewed either from the perspective of equity, supra, ¶ 11, or by some reference to its single member on the eleven-member WFA Board of Directors. Kansas City owns none of WFW. Supra, ¶¶ 29-37. Since Kansas City owns less than 10 percent of WFA, even WFA’s voting interest in WFW cannot result in indirect control of WFW by Kansas City. (Barring additional information, the result would be different for Basin, which controlled two of WFA’s eleven directors, and two of WFW’s five directors and therefore more than ten percent in each case). We are likewise unaware of any demonstration by the auditors that Kansas City actually or legally controlled WFW.
115. The Board notes the absence of any contention, based on ownership or exercise of power, that WFA or WFW controlled Kansas City.
116. The Board recognizes the possibility that the showing required of WFW to secure a reduction in its federal royalty rate – the issue which attracted Detheridge’s attention – may have hinged on a different standard of affiliation or control than the royalty-related definition in 30 C.F.R. § 206.451. Our record provides no basis for pursuing this possible alternative standard. We only know Detheridge made no effort to contact the author of the Bureau of Land Management study to satisfy himself that her conclusions were correct. [Transcript Vol. III, p. 448].
117. At the time of the hearing, the Minerals Management Service had not yet acted on the December 22, 2005, audit report of the Department of Audit [Transcript Vol. III, p. 303], so we could not know whether the Minerals Management Service had embraced the auditors’ conclusions.
118. The Department assured the Board that it did not take the position that all contracts involving WFA and its members must not be arm’s-length. [Transcript Vol. I, pp. 35-38]. Yet if Detheridge’s broad affiliation standard were to govern the analysis of any contract between WFA and its members for supply and delivery services, it is hard to see how this result could be avoided.
119. We find instead that Detheridge did not adequately consider the standard he was applying. As a result, we find no reason to defer to any claimed exercise of auditor judgment in the determination reached November 22, 2005, and articulated in the Department’s letter of December 9, 2005.
120. When we look beyond Detheridge’s unspecified suspicions concerning the relationship between Kansas City and WFA [Transcript Vol. III, pp. 414-415], and the relationship between WFA and WFW, we discern only two points, neither of which is persuasive. The first point is that some Board members of WFA were also Board members of WFW. [Transcript Vol. II, pp. 425-426]. In fact, the only two overlapping Board members were Basin and Tri-State, for reasons we have already explored and accepted. Supra, ¶¶ 26-38. The second point is that WFW had conceded that WFW’s contracts with Class A members were not arm’s-length, and WFW was unable to satisfy the auditors that a contract with a Class B member should be treated differently. [Transcript Vol. III, p. 443]. Neither of these points is compelling.
121. The auditors were, of course, free to analyze the circumstances in some way other than by the federal royalty standard for control. Whatever that mode of analysis may have been, at the time of the decision on November 22, the Department of Audit lacked a number of documents and other information which provide significant insight into the relationships between WFA, WFW, and Kansas City. Specifically, it did not have the 1979 coal purchase contract between WFA and Kansas City [Exhibit 109], nor did it have the related December 5, 2000, agreement between WFA and Kansas City. [Exhibit 120; Transcript Vol. III, pp. 442-443]. The auditors were unaware of how the $2.74 price in the contract between WFW and Kansas City was derived from the price in the Peabody Contract. [Transcript Vol. III, p. 424]. They did not look at WFA’s Articles of Incorporation [Exhibit 512; Transcript Vol. III, p. 429-430], which they now deem significant. [Transcript Vol. III, pp. 428, 452-453]. They did not look at what the markets were doing in the late 1990s or early 2000, or at market prices in the Powder River Basin during that time. [Transcript Vol. III, p. 423].
122. After listening to WFW’s case and its points concerning WFA control of WFW, Detheridge stated his opinions had been reinforced rather than changed. [Transcript Vol. III, p. 452]. As an example, he cited a provision of the WFA Articles of Incorporation which prohibits sales of fuels to WFA nonmembers, except: (1) the United States of America or its political subdivisions; (2) the states of the United States; or (3) nonmember customers to effect a disposal of a temporary surplus of fuels. [Exhibit 512; Transcript Vol. III, p. 452]; supra, ¶ 5. Detheridge assumed that the WFA Articles of Incorporation controlled WFW as well, contrary both to common principles of corporate law, infra, ¶ 166, and to the testimony of Johnson [e.g., Transcript Vol. I, p. 89], and did so without any consideration of the Articles of Incorporation or by-laws of WFW. [Transcript Vol. III, pp. 452-453]. We again find no reason to defer to any claimed exercise of auditor judgment in the determination reached November 22, 2005, and articulated in the Department’s letter of December 9, 2005.
123. Detheridge asserted one more area of concern, the profitability of WFW. Detheridge acknowledged WFW profitability was not a proper concern in an audit [Transcript Vol. III, pp. 421, 454], but nonetheless stated that the price of the coal [Transcript Vol. III, pp. 423-424, 453] and WFW’s profitability were “red flags.” [Transcript Vol. III, pp. 421, 454]. Detheridge amplified on this point by stating a concern that WFW felt compelled to sell at or below market. [Transcript Vol. III, p. 422]. He pointed to Koch’s concession that Dry Fork made no profit, and noted Koch never indicated that WFW intended to make a profit. [Transcript Vol. III, pp. 443, 454]. He expressed a related concern that WFW might be selling the coal under market just to drive down the open market price of coal for Laramie River Station. [Transcript Vol. III, p. 423]. However, these red flags did not lead anywhere. In particular, Detheridge acknowledged that the auditors made no effort to investigate the market prices in the Basin at the time. [Transcript Vol. III, p. 423]. Detheridge’s various suspicions are entitled to little weight in the face of the testimony, with documentation, presented by WFW.
124. The Board finds WFW carried its burden of going forward, and the burden shifted to the Department to defend its action. The Department was, of course, free to do so by going beyond the testimony of Detheridge and WFW’s witnesses, and to rely on all evidence presented in the case.
J. The Department’s evidence
125. As its only witness, the Department called Craig Grenvik, Administrator of the Mineral Tax Division of the Department of Revenue, to speak on behalf of the Department. [Transcript Vol. III, p. 460]. Grenvik signed the Department’s assessment letter for Dry Fork’s production years 2001 and 2002. [Exhibit 101; Transcript Vol. III, pp. 461-462]. The assessment letter incorporated the findings of the Department of Audit. [Exhibit 101, p. WF 28].
126. The Department is accustomed to a paradigm for an arm’s-length agreement in coal industry contracts. [Transcript Vol. III, p. 484]. The norm in Wyoming is a coal mining company selling to an unrelated utility, with both parties trying to maximize profit. [Transcript Vol. III, pp. 484, 508]. For these mines, sale prices generally become a surrogate for fair market value.
127. At the opposite end of the spectrum is a coal mine which is entirely the captive of a utility, where the only contracts are within the company. [Transcript Vol. III, p. 464]. Typically, this type of contract is not used as a valid component of the Department’s determination of fair market value. [Transcript Vol. III, p. 467]. Within its established statutory framework, the Department has developed various approaches to determine the fair market value of coal where the arm’s-length paradigm is not met. [Transcript Vol. III, pp. 463-468]. These approaches include recognizing circumstances in which a non-arm’s-length contract price can be representative of a pricing in a bona fide arm’s-length contract. [Transcript Vol. III, p. 468].
128. The contract between WFW and Kansas City did not fit the Department’s paradigm for contracts between wholly independent parties, thereby generating a list of “red flags” for the Department. [Transcript Vol. III, pp. 469, 473-474, 518-532]. These red flags prompted the Department to investigate the situation in more detail. [Transcript Vol. III, p. 522]. Its investigation included review of WFW’s filings with the Department of Environmental Quality, and seeing how Petitioner’s business was portrayed on its own website. [Transcript Vol. III, p. 474]; supra, ¶¶ 88-91.
129. Grenvik identified five red flag issues: (1) affiliation; (2) “finding that the [Minerals Management Service] is taking a close look at this”; (3) WFW’s admission that its other contracts were not arm’s-length; (4) pricing that “looked low”; and (5) Petitioner’s failure to provide information on this issue after providing “a lot of information regarding all the other issues.” [Transcript Vol. III, pp. 473-474]. The Board considered each of these issues in turn, together with related points as they arose.
130. The Department was surprised when Detheridge’s review of federal royalty documentation disclosed Kansas City was a member of WFA. [Transcript Vol. III, p. 469]. “Affiliation” between a producer and a utility “always raises red flags for us, because we had to deal with it in other situations.…” [Transcript Vol. III, p. 469]. In this case, Grenvik considered the affiliation more significant because WFW had conceded that agreements with Laramie River Station and the Leland Olds plant were not arm’s-length. [Transcript Vol. III, p. 469]. According to Grenvik, the arrangement by which WFA promises to do the very best it can for its members, and delivers coal to its members at cost, shows affiliation. [Transcript Vol. III, p. 485].
131. But the Department was not persuasive in this use of the term “affiliation.” Grenvik acknowledged the Department has no rule defining the term, and is not asking this Board to create such a definition. [Transcript Vol. III, pp. 518-519]. He also acknowledged that all contracts in which WFA represents one of its members would be non-arm’s-length under this approach, even though the Department did not intend such a result. [Transcript Vol. III, pp. 519-520]. Indeed, the Department did not intend “that affiliation be mentioned in any type of decision [by this Board] whatsoever.” [Transcript Vol. III, p. 520].
132. While Grenvik chose not to pursue the red flag of affiliation, he strongly articulated the Department’s view about the relationship between WFA and WFW: “Western Fuels Association and Western Fuels-Wyoming really are, in my mind, one and the same. Wyoming Fuels-Wyoming jumps when Western Fuels Association says jump.” [Transcript Vol. III, pp. 478-479]. Grenvik recognized that WFW and WFA were separate corporations, and that he was not an expert in corporate law, but understood WFW was “bound by Western Fuels Association” because it was “owned by Western Fuels Association.” [Transcript Vol. III, p. 498]. He expressed his understanding of WFA’s dominance of WFW a variety of ways:
“…I believe Western Fuels Association pretty much tells Western Fuels-Wyoming here’s – here’s what we’re going to do.” [Transcript Vol. III, p. 482].
“And WFA, basically acting on behalf of the other two parties, can create these contracts and basically force them to enter into these contracts for the overall best interests of the co-op.” [Transcript Vol. III, pp. 495-496].
“My understanding is Western Fuels [Association], if they can provide coal to one of its members and the members want that coal, then they can instruct Western Fuels-Wyoming, basically Dry Fork, how much coal you’re going to produce, how much you won’t produce.” [Transcript Vol. III, p. 501].
“My understanding is that WFW cannot enter into the contracts without WFA’s approval.” [Transcript Vol. III, p. 536]; see Koch’s testimony directly to the contrary, supra, ¶¶ 67-68.
133. The Board cannot find any factual basis in Grenvik’s testimony, or elsewhere in the record, to support these convictions. To the contrary, Grenvik conceded WFA’s ability to force anyone into a contract was an impression, but something he didn’t know about. [Transcript Vol. III, p. 529]. He had no reason from personal knowledge to dispute Olsen’s testimony that the WFA Board of Directors could not tell the WFW Board of Directors what to do. [Transcript Vol. III, p. 503].
134. The Department’s view of control also extended to the relationship between Kansas City and WFA: “My understanding was that in order to be a Class B member, you’re going to have to take what WFA gives you.” [Transcript Vol. III, p. 528]. Grenvik did not think Kansas City had the right to refuse a potential supplier selected by WFA. [Transcript Vol. III, pp. 494, 510]. The Board again cannot find any factual basis in Grenvik’s testimony, or elsewhere in the record, see supra, ¶¶ 14-15, to support this opinion. We reach the same finding with respect to Grenvik’s view that the provisions of WFA’s Articles of Incorporation relating to sales of temporary surplus in some way bind WFW. [Transcript Vol. III, pp. 478-479, 494, 538-539]; supra, ¶ 5.
135. Grenvik touched on other indicators of control, such as the statement in Dry Fork Mine’s annual report to the Department of Environmental Quality, supra, ¶ 88, 90, and the consolidated financial statements in WFA’s annual report to its members, supra, ¶ 91, to support the Department’s position regarding WFA control of WFW. [Transcript Vol. III, pp. 474-476]. We find nothing in these documents that would cause us to disturb our findings regarding the economic realities underlying of the contract between WFW and Kansas City. Supra, ¶ 38.
136. Grenvik’s second red flag was the attention paid to affiliation by the Minerals Management Service. Supra, ¶ 129. In response to a question from his counsel, Grenvik confirmed the Department’s awareness, thanks to Detheridge, “that MMS was raising a question.” [Transcript Vol. III, pp. 470-471]. From the testimony of Detheridge and a document, this does not appear to be an accurate statement. The question was raised by the Bureau of Land Management, if anyone, supra, ¶ 97, 106, then repeated by Wyoming’s Department of Audit in the report it prepared on behalf of the Minerals Management Service. [Exhibit 105]. In fact, the Minerals Management Service had not acted on the auditors’ report at the time of the hearing. Supra, ¶ 117. We find it likely that Grenvik confused the concerns expressed by the auditors with concerns expressed by the Minerals Management Service. The Board has already discussed its reasons for questioning the substance of the auditors’ concerns. Supra, ¶¶ 114-116.
137. As important, the Department conceded the significance of differences in the state tax regime and the federal royalty regime. The only direct impact the Code of Federal Regulations has on state taxes is in calculating exempt royalty. [Transcript Vol. III, p. 521]. The Minerals Management Service red flag was merely something that prompted the Department to look at the situation in greater detail. [Transcript Vol. III, p. 522]. Having looked at the situation in greater detail, the Board finds the attention which the Minerals Management Service supposedly paid to affiliation to be of no significance.
138. The third red flag was WFW’s admission that its other contracts were not arm’s-length. Supra, ¶ 129. Along with his surprise at learning that Kansas City was a member of WFA, Grenvik also expected WFW to readily concede the Kansas City contract was like WFW’s contracts with Laramie River Station and Leland Olds, and hence not arm’s-length. [Transcript Vol. III, pp. 469-470, 490]. “They [WFW] have another [contract], Leland Olds, that was determined to be nonarm’s-length at the last audit, so now we find another one, so I don’t think it was unreasonable, just with that amount of information, to think that it would be any different.” [Transcript Vol. III, p. 470].
139. We find the Department’s inference regarding the Kansas City contract, as drawn by Grenvik from the Laramie River Station and Leland Olds contracts, to be unpersuasive. Grenvik was dismissive of the network of agreements between WFA, WFW, and Kansas City, noting he had previously been unaware of them, and that “I’m still not sure I’ve got it all down.” [Transcript Vol. III, p. 470]. Grenvik acknowledged distinctions between WFW’s Kansas City and Laramie River Station contracts, including the cost-only basis of the latter, and the equity exposure of the Laramie River Station participants in WFW. [Transcript Vol. III, p. 524]. Finally, Grenvik conceded he had too little knowledge concerning the Leland Olds contract to compare it with the Kansas City contract. [Transcript Vol. III, p. 525].
140. The fourth red flag was pricing that “looked low.” Supra, ¶ 129. It is not clear to the Board that this was Grenvik’s main point. Grenvik noted that when the Department considered pricing for other taxpayers, particularly when an alternative valuation method was warranted, the Department adjusted comparable arm’s-length contracts for Btu content. [Transcript Vol. III, pp. 466, 523]. Although Grenvik initially indicated the Laramie River Station pricing used to revalue the sales to Kansas City had been adjusted for Btu content [Transcript Vol. III, p. 490], he eventually conceded the price used in the audit made no such adjustment. [Exhibit 100, p. WF 008; Transcript Vol. III, pp. 534-535, 544]. He went on to state, “I wasn’t bothered with how high the price was so much as it wasn’t really indicative of the relationship between Kansas City and…its co-op.” [Transcript Vol. III, p. 490].
141. The Board finds the Department has not made a persuasive argument that the price was too low. The pricing demonstration of Koch, based on regularly published quotes from a published source, together with the “junk” quality of coal originally intended for Kansas City, provided a sounder basis for evaluating the price offered to Kansas City. Supra, ¶¶ 57-58, 60.
142. This does not dispose of the matter, because we understand Grenvik to be making a number of different points about WFW’s pricing policy, all of which hinge on the Department’s paradigm for an arm’s-length agreement, involving independent utility-buyers and independent producer-sellers. Supra, ¶ 126; [Transcript Vol. III, p. 484]. In the paradigm, both entities are trying to generate as much profit as possible. [Transcript Vol. III, p. 484]. By implication, a selling price will normally reflect more than the recovery of incremental (or marginal) costs [Transcript Vol. III, pp. 485, 492, 506], because the seller cannot remain financially viable if it only recovers marginal cost. [Transcript Vol. III, p. 507]. The Board does not question these positions.
143. The Department is obliged to remain alert to transactions which serve no purpose other than to concentrate profit at the level of the utility-buyer while removing profit from the producer-seller, because the prices which result from such transactions understate the fair market value of Wyoming coal. [Transcript Vol. III, pp. 531-532]. One way the Department can identify such transactions is by the absence of a profit component. [Transcript Vol. III, pp. 508, 523]. The Board does not question these positions.
144. There is no dispute in this case that WFW priced its contract with Kansas City on a incremental cost basis. Supra, ¶¶ 55-56. For this reason alone, the contract does not square with the Department’s expectations.
145. At the same time, Grenvik acknowledges that there may be situations in which a mine would be willing to enter into an incrementally priced contract to ride out an economic storm. [Transcript Vol. III, p. 507]. WFW’s evidence supports a finding that WFW was in fact concerned about riding out such a storm. Supra, ¶ 59. The Board’s focus accordingly narrows to the Department’s reasons for disbelieving WFW’s evidence, or for otherwise refusing to honor the implications of WFW’s proffered testimony.
146. The principal thread of Grenvik’s logic turns on the Department’s perception of the motivations and powers of WFA. Grenvik was troubled by the implications of WFA’s mission as he understood it, which was to ensure its members an adequate coal supply at the lowest possible cost [Transcript Vol. III, p. 480] without generating any profit of its own. [Transcript Vol. III, p. 485]. This concern was complicated by WFA’s role in administering contracts on behalf of the buyer, because a buyer typically acts more directly in its own interest. [Transcript Vol. III, p. 487]. Grenvik further expressed a concern that WFA and its directors drove down costs to satisfy the Laramie River Station participants, and in doing so both provided a kind of subsidized price for the benefit of Kansas City, and removed any profit component from WFW. [Transcript Vol. III, pp. 493-494, 512-513].
147. The Board is not persuaded by this view of WFA. Considering all the evidence in the record, we find it is more sensible to view WFA as providing services to Kansas City, and receiving an override as compensation. WFA’s motivation was its continued existence, which depended on the value of the services provided to its members. For Kansas City, the services related not only to savings in the form of administrative burdens related to entering and performing a coal contract, but also to savings to be realized from aggregated buying power, supra, ¶¶ 192, 48, and savings related to arranging for and administering arrangements for the delivery of coal to Kansas City’s plant.
148. The Board can readily distinguish the motivations of the Laramie River Station participants from those of WFA and Kansas City. The Laramie River Station participants bore the equity risk of WFW, controlled the contracting decisions of WFW through its Board of Directors, and had an agreement which explicitly provided no consideration be paid to WFW for coal other than certain agreed costs, calculated in an agreed manner. Supra, ¶¶ 28-38, 40, 85.
149. The Board also finds that Grenvik unpersuasively places WFA in the position of driving the transaction between Kansas City and WFW. Considering all the evidence in the record, we find it more sensible to view the transaction as governed by the economic interests and judgments of the Laramie River Station participants in WFW on the one hand, and the economic interests and judgments of Kansas City on the other. The Board further finds it implausible that the Laramie River Station participants would approve a contract devoid of profit, if a profit could have been made on Dry Fork coal. We find no reason to assume WFA’s general mission of providing low cost coal to all its members extended to doing so at the expense of the Laramie River Station participants. After all, the two principal Laramie River Station participants, Basin and Tri-State, supra, ¶ 25, controlled a majority of the voting strength on both the WFA Board – six of eleven – and the WFW Board – four of five. Johnson sensibly observed that when meeting its objective of providing low cost coal for each of WFA’s individual members, WFA did not “want to negatively impact another member someplace.” [Transcript Vol. I, p. 70].
150. The final red flag was Petitioner’s failure to provide information on this issue. We cannot credit this concern in the face of the Department’s speedy decision on the issue. State officials surprised Petitioner with this issue on November 22, then reached a final conclusion shortly after the meeting. Supra, ¶¶ 99-103. By the close of all evidence in this proceeding, the Department also had ample opportunity to consider Petitioner’s evidence.
151. The issues which Grenvik initially identified as red flags did not exhaust the Department’s concerns. The Department did not view the contract between Kansas City and WFW as conforming to a paradigm for a “transaction you would see between nonaffiliated third party entities.” [Transcript Vol. III, pp. 489, 500]. Grenvik noted the absence of standard boilerplate language, and the paucity of provisions “on pricing and escalators and billing and how pass-throughs are going to work.” [Transcript Vol. III, pp. 489-490]. At the same time, he conceded a contract of any length can be valid and binding [Transcript Vol. III, p. 500], and did not dispute that Article 2 of the Uniform Commercial Code could supply missing contract terms by reference to custom and usage in the industry. [Transcript Vol. III, p. 501].
152. As a separate point regarding the contracts at issue, Grenvik identified the atypical administration provisions of the two contracts, “where the seller [WFA] is administering the coal supply [agreements] and acting on behalf of the purchaser [Kansas City].” [Transcript Vol. III, pp. 487-489]. He explained the concern further by observing, “you certainly would want to have an arrangement with them where you know they’re acting on your behalf, in your best interest.” [Transcript Vol. III, p. 488]. This point appears to be nothing more than a variation on the Department’s understanding of the degree of control WFA exercised over WFW. Supra, ¶ 132. We find it unpersuasive.
153. Grenvik doubted the coal had been offered up in a competitive market. [Transcript Vol. III, pp. 495-496]. To the extent this point tied to his view of the degree of control WFA exercised over WFW, we find it unpersuasive. Supra, ¶ 132. To the extent he expressed a view about WFW’s attempt to market the coal, we find the testimony of Petitioner’s witnesses more persuasive. E.g., supra, ¶¶ 76-77.
154. Grenvik conceded that both WFW and Kansas City were well informed, but doubted a prudent seller would be willing to do nothing but cover the cost of the coal it sold. [Transcript Vol. III, p. 496]. On this point, we again find the testimony of Petitioner’s witnesses to be more persuasive. E.g., supra, ¶¶ 44-48, 55-57, 75-77.
155. Grenvik indicated the contract between Kansas City and WFW may have been the product of duress, due to the potential for closing the mine. [Transcript Vol. III, pp. 482, 512]. He also believed “Kansas City had to take that coal as a Class B member, and that was because of a decision by WFA.” [Transcript Vol. III, p. 494]. Similarly, he believed “Kansas City took that ramped up production in order to benefit the Association as a whole, including Laramie River Station.” [Transcript Vol. III, p. 497].
156. The Board agrees there was potential for closing the mine, supra, ¶ 59, but disagrees with Grenvik’s other factual premises regarding duress. We find Kansas City was not bound by a decision of WFA to take the WFW coal, but at all times had a right to approve or disapprove potential coal supplies proposed by WFA. Supra, ¶¶ 14-15. We find nothing in the record to support the claim that Kansas City took the coal in order to benefit the Association, but instead find Kansas City was motivated by its own satisfaction with the proposed WFW contract. E.g., supra, ¶ 55. We find the interests of WFA were not conterminous with the interests of the Laramie River Station participants, supra, ¶ 38, and therefore disagree that benefit to the WFA and benefit to the Laramie River Station participants were one and the same in the context of the contracts between Kansas City and WFW, and between Kansas City and WFA.
157. Whether the potential for closing the mine could constitute duress is a question of law. See Conclusions of Law, ¶¶ 167.
158. We find the Department has not sustained the burden of defending its actions.
159. Petitioner has carried its burden of persuasion.
160. Any portion of the Conclusions of Law: Principles of Law or the Conclusions of Law: Application of Principles of Law set forth below which includes a finding of fact may also be considered a Finding of Fact and, therefore, is incorporated herein by reference.
CONCLUSIONS OF LAW: PRINCIPLES OF LAW
161. In pertinent part, Wyoming Statutes provide:
“As used in [Article 1, Coal, of Chapter 14, Mine Product Taxes, of Title 39 of the Wyoming Statutes]:
(i) ‘Arm's-length market or sales price’ means the transaction price determined in connection with a bona fide arm's length sale;
(ii) ‘Bona fide arm's-length sale’ means a transaction in cash or terms equivalent to cash for specified property rights after reasonable exposure in a competitive market between a willing, well informed and prudent buyer and seller with adverse economic interests and assuming neither party is acting under undue compulsion or duress.…
Wyo. Stat. Ann. § 39-14-101(a)(i) and (ii).
(a) Taxable event. The following shall apply:
(i) There is levied a severance tax on the value of the gross product for the privilege of severing or extracting both surface and underground coal in the state. The severance tax imposed by this article may be in addition to other taxes, including but not limited to the ad valorem taxes imposed by W.S. 39-13-104.
Wyo. Stat. Ann. § 39-14-103(a)(i).
(b) Basis of tax (valuation). The following shall apply:
(i) Coal shall be valued for taxation as provided in this subsection;
(ii) The value of the gross product shall be the fair market value of the product at the mouth of the mine where produced, after the mining or production process is completed;
(iii) Except as otherwise provided, the mining or production process is deemed completed when the mineral product reaches the mouth of the mine. In no event shall the value of the mineral product include any processing functions or operations regardless of where the processing is performed;
(iv) Except as otherwise provided, if the product as defined in paragraph (iii) of this subsection is sold at the mouth of the mine, the fair market value shall be deemed to be the price established by bona fide arms-length sale;
* * *
(vi) In the event the product as defined in paragraph (iii) of this subsection is not sold at the mouth of the mine by bona fide arms-length sale, or, except as otherwise provided, if the product of the mine is used without sale, the department shall determine the fair market value of coal in accordance with paragraph (vii), (viii), (ix) or (x) of this subsection;
(vii) For coal sold away from the mouth of the mine pursuant to a bona fide arms-length sale, the department shall calculate the fair market value of coal by multiplying the sales value of extracted coal, less transportation to market provided by a third party to the extent included in sales value, all royalties, ad valorem production taxes, severance taxes, black lung excise taxes and abandoned mine lands fees, by the ratio of direct mining costs to total direct costs. Nonexempt royalties, ad valorem production taxes, severance taxes, black lung excise taxes and abandoned mine lands fees shall then be added to determine fair market value. For purposes of this paragraph:
(A) The sales value of extracted coal shall be the selling price pursuant to an arms-length contract.…
* * *
(viii) For coal used without sale, or coal not sold pursuant to a bona fide arms-length agreement, the sales value for the purposes of paragraph (vii) of this subsection shall be the fair market value of coal which is comparable in the quality, quantity, terms and conditions under which the coal is being used or sold, both in the spot market and through long-term agreements negotiated within the previous twelve (12) months, multiplied by the respective number of tons used or sold for each reporting period;
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(x) In the event that unique or unusual circumstances exist such that the department or the taxpayer is unable to determine the value of the gross product of coal from a mine or mining claim by application of the methods provided in this subsection, the taxpayer may petition the department for approval to use an alternate valuation method. The department shall approve or deny the use of an alternate valuation method and shall so inform the parties within forty-five (45) days of the date the petition is filed.
Wyo. Stat. Ann. § 39-14-103(b).
162. “…[T]he Petitioner shall have the burden of going forward and the ultimate burden of persuasion, which burden shall be met by a preponderance of the evidence. If Petitioner provides sufficient evidence to suggest the Department determination is incorrect, the burden shifts to the Department to defend its action.…” Rules, Wyoming State Board of Equalization, Chapter 2, § 20.
163. "The legislature has made the policy decision that the Department is the state entity responsible for valuing property.” Amoco Prod. Co. v. Dep’t of Revenue, 2004 WY 89, ¶ 25, 94 P.3d 430, 441 (Wyo. 2004). “The valuation of the Department is presumed valid. The officials charged with establishing value are presumed to have exercised honest judgment in accordance with applicable statutes, rules, and regulations.” Id. at ¶ 43.
164. The role of this Board is strictly adjudicatory:
It is only by either approving the determination of the Department, or by disapproving the determination and remanding the matter to the Department, that the issues brought before the Board for review can be resolved successfully without invading the statutory prerogatives of the Department.
Amoco Production Company v. Wyoming State Board of Equalization, 12 P.3d 668, 674 (Wyo. 2000).
165. The Wyoming Supreme Court has summarized our obligation to interpret statutes by reference their language:
…“Determining the lawmakers’ intent is our primary focus when we interpret statutes. Initially, we make an inquiry respecting the ordinary and obvious meaning of the words employed according to their arrangement and connection. We construe together all parts of the statutes in pari materia, giving effect to each word, clause, and sentence so that no part will be inoperative or superfluous. We will not construe statutes in a manner which renders any portion meaningless or produces absurd results.” In re WJH, 2001 WY 54, ¶ 7, 24 P.3d 1147, ¶ 7 (Wyo. 2001).
TPJ v. State, 2003 WY 49, ¶ 11, 66 P.3d 710, 713 (Wyo. 2003).
166. The Wyoming Supreme Court considers the following principles when determining whether a corporate entity may be disregarded:
[¶4]…As a general rule, a corporation is a separate entity distinct from the individuals comprising it. Opal Mercantile v. Tamblyn, 616 P.2d 776, 778 (Wyo. 1980). Wyoming statutes governing corporations do not address the circumstances under which the veil can be pierced. However, since 1932, this court has espoused the concept that a corporation’s legal entity will be disregarded whenever the recognition thereof in a particular case will lead to injustice. See Caldwell v. Roach, 44 Wyo. 319, 12 P.2d 376, 380 (1932). In Miles v. CEC Homes, Inc., 753 P.2d 1021, 1023 (Wyo. 1988) (quoting Amfac Mechanical Supply Co. v. Federer, 645 P.2d 73, 77 (Wyo. 1982)), this court summarized the circumstances under which the corporate veil would be pierced pursuant to Wyoming law:
“ ‘Before a corporation’s acts and obligations can be legally recognized as those of a particular person, and vice versa, it must be made to appear that the corporation is not only influenced and governed by that person, but that there is such a unity of interest and ownership that the individuality, or separateness, of such person and corporation has ceased, and that the facts are such that an adherence to the fiction of the separate existence of the corporation would, under the particular circumstances, sanction a fraud or promote injustice.’ Quoting Arnold v. Browne, 27 Cal. App. 3d 386, 103 Cal. Rptr. 775 (1972)(overruled on other grounds).”
We provided the following factors to be considered in determining whether a corporate entity may be disregarded:
“ ‘Among the possible factors pertinent to the trial court’s determination are: commingling of funds and other assets, failure to segregate funds of the separate entities, and the unauthorized diversion of corporate funds or assets to other than corporate uses; the treatment by an individual of the assets of the corporation as his own; the failure to obtain authority to issue or subscribe to stock; the holding out by an individual that he is personally liable for the debts of the corporation; the failure to maintain minutes or adequate corporate records and the confusion of the records of the separate entities; the identical equitable ownership in the two entities; the identification of the equitable owners thereof with the domination and control of the two entities; identification of the directors and officers of the two entities in the responsible supervision and management; the failure to adequately capitalize a corporation; the absence of corporate assets, and undercapitalization; the use of a corporation as a mere shell, instrumentality or conduit for a single venture or the business of an individual or another corporation; the concealment and misrepresentation of the identity of the responsible ownership, management and financial interest or concealment of personal business activities; the disregard of legal formalities and the failure to maintain arm’s length relationships among related entities; the use of the corporate entity to procure labor, services or merchandise for another person or entity; the diversion of assets from a corporation by or to a stockholder or other person or entity, to the detriment of creditors, or the manipulation of assets and liabilities between entities so as to concentrate the assets in one and the liabilities in another; the contracting with another with intent to avoid performance by use of a corporation as a subterfuge of illegal transactions; and the formation and use of a corporation to transfer to it the existing liability of another person or entity [citation].’ ” 645 P.2d at 77-78 (quoting Arnold v. Browne, supra, 103 Cal. Rptr. at 781-82).
Miles, 753 P.2d at 1023-24.
[¶5] Wyoming courts, as well as courts across the country, have typically utilized a fact driven inquiry to determine whether circumstances justify a decision to pierce a corporate veil. Opal Mercantile, 616 P.2d at 778.
* * *
[¶6] We have long recognized that piercing the corporate veil is an equitable doctrine. State ex rel. Christensen v. Nugget Coal Co., 60 Wyo. 51, 144 P.2d 944, 952 (1944). The concept of piercing the corporate veil is a judicially created remedy for situations where corporations have not been operated as separate entities as contemplated by statute and, therefore, are not entitled to be treated as such. The determination of whether the doctrine applies centers on whether there is an element of injustice, fundamental unfairness, or inequity.
Kaycee Land and Livestock v. Flahive, 2002 WY 73, ¶¶ 4-6, 46 P.3d 323, 325-326 (Wyo. 2002).
167. The Wyoming Supreme Court has stated the test for economic duress:
“…Whether particular facts are sufficient to constitute economic duress is a question of law. Whether these circumstances exist is a question of fact. [citation omitted]. The Tenth Circuit Court of Appeals, when applying Wyoming law to a duress defense to avoid the enforcement of an agreement, said:
The Wyoming test for duress is not inconsistent with the test for economic duress developed in those states which have expressly recognized economic duress as grounds for avoiding a settlement.
[citation omitted]. This Court, however, has not directly had the opportunity to adopt what is commonly known as the ‘economic duress’ doctrine. We take this opportunity now to do so and embrace the three-prong test employed by many courts to determine whether economic duress exists. Under this test, economic duress occurs when (1) a party involuntarily accepts the terms of another, (2) circumstances permit no other alternative, and (3) such circumstances are the result or coercive acts of the other party. [citations omitted]. Economic duress does not exist, however, unless a person has been the victim of a wrongful act and has no reasonable alternative but to agree with the terms of another or be faced with a serious financial hardship. [citation omitted]. What constitutes a coercive act or reasonable alternative is a question of fact depending on the circumstances of each case. [citations omitted].…A person may not have a reasonable alternative or remedy when the delay of pursuing the remedy would cause immediate or irreparable serious loss or financial ruin. [citations omitted].”
Blubaugh v. Turner, 842 P.2d 1072, 1074-1075 (Wyo. 1992).
CONCLUSIONS OF LAW: APPLICATION OF PRINCIPLES
168. The question presented in this case is whether the sale prices found in the letter agreement between WFW and Kansas City, dated December 5, 2000, determined the fair market value of the 1,069,101 tons of coal WFW produced and sold to Kansas City in production year 2001 and determined the fair market value of the 1,058,871 tons of coal WFW produced and sold to Kansas City in production year 2002. See Findings, ¶ 95. By statute, the Department must base its determination of value on “the selling price pursuant to an arms-length contract” when available. Wyo. Stat. Ann. § 39-14-103(b)(vii)(A). The statute defines an arm's-length sales price to mean the transaction price determined in connection with a bona fide arm's-length sale. Wyo. Stat. Ann. § 39-14-101(a)(i). The Board notes that the variant spellings, “arms-length” and “arm’s-length,” accurately reflect variant spellings in the cited statutes.
169. The statute defines bona fide arm’s-length sale:
(ii) "Bona fide arm's-length sale" means a transaction in cash or terms equivalent to cash for specified property rights after reasonable exposure in a competitive market between a willing, well informed and prudent buyer and seller with adverse economic interests and assuming neither party is acting under undue compulsion or duress;
Wyo. Stat. Ann. § 39-14-101(a)(ii). Conclusions ¶ 161. The Board’s enquiry in this case accordingly must focus on “a transaction” with the qualities specified by statute. We will first state our conclusions, and then address the parties’ various arguments for alternative or contrary conclusions.
170. We conclude the only transaction in the record which can properly be characterized as a “transaction in cash or terms equivalent to cash for specified property rights” was the transaction in the letter agreement between WFW and Kansas City, dated December 5, 2000. Findings ¶¶ 62-68.
171. With regard to that transaction, the principal question before us is whether Kansas City as buyer and WFW as seller had “adverse economic interests.” We conclude there were adverse economic interests.
172. The economic interest of Kansas City lay in securing an acceptable supply of coal for a price which fairly reflected the quality of the coal. Findings, ¶¶ 48-50, 53, 55, 58. The economic interest of WFW was principally the economic interest of the Laramie River Station participants. The Laramie River Station participants sought a price which would reduce their fuel billings by spreading the Mine’s costs over a larger volume, and generate a profit if possible. Findings, ¶¶ 44-46, 56-58. Kansas City accordingly had an interest in paying the lowest price it could, WFW had an interest in receiving the highest price it could.
173. WFW also anticipated benefits not directly related to maximizing revenue which would have affected the sales price it was willing to accept. WFW managers believed they could improve the quality of coal shipped to Laramie River Station. Findings, ¶ 57. WFW managers worried that an interruption in operations could compromise WFW’s ability to survive in the marketplace. Findings, ¶ 59.
174. We conclude the transaction followed “reasonable exposure in a competitive market.” Petitioner’s witnesses testified to its diligent efforts to market Dry Fork Mine coal. Findings, ¶¶ 76-77. WFW sold coal to PacifiCorp both before, Findings, ¶ 52, and after the transaction at issue. Findings, ¶ 83. Dry Fork’s coal was at a competitive disadvantage to coal produced by its competitors in the Powder River Basin, Findings, ¶ 44, and the actual price of the transaction was consistent with Btu-adjusted prices for other Powder River Basin coal in 2000. Findings, ¶ 60.
175. We conclude WFW was a prudent seller. “Prudent” is commonly defined to mean either “capable of exercising sound judgment in practical matters, esp. as concern’s one’s own interests” or “cautious or discreet in conduct; circumspect; not rash.” Webster’s New World College Dictionary 1156 (4th Edition 2001); accord, Black’s Law Dictionary 1241 (7th Edition 1999). WFW had a consistent and coherent set of reasons for agreeing to the transaction, from which we infer the requisite capability for sound judgment, and circumspection.
176. We conclude WFW was not “acting under undue compulsion or duress.” The Wyoming Supreme Court has stated the elements of a showing of “economic duress.” Conclusions, ¶ 167. The economic difficulties faced by WFW, Findings, ¶¶ 44, 56-57, 59, did not place it in a position where it had no reasonable alternative, and there is no evidence that WFW was the subject of a wrongful act. The Department has not presented argument specific to these elements. See Kendrick v. Barker, 2001 WY 2, ¶24, 15 P.3d 734, 741 (Wyo. 2001).
177. Our conclusions imply a view of the contract between WFA and Kansas City which differs from that of the Department. The contract between WFA and Kansas City antedated the contract between WFW and Kansas City by more than ten years. Findings, ¶¶ 13, 62. As noted by Johnson, the WFW/Kansas City contract would have constituted a breach of the WFA/Kansas City contract had not the latter been modified simultaneously. Findings, ¶ 73. Under the modification, WFA continued to provide Kansas City certain services, including arrangements for rail transportation and responsibility for arranging an alternative supply of fuel if the Dry Fork coal proved unsatisfactory. Findings, ¶¶ 66-72. WFA’s compensation has at all times been its $.125 per ton override. Findings, ¶ 17.
178. From the perspective of the contract between WFA and Kansas City, there was every reason for WFA to be intimately involved in arranging the contract between WFW and Kansas City. Indeed, that was one of the principal purposes of the service contract. Findings, ¶¶ 13-16. At the same time, we found no evidence which demonstrated WFA could force either WFW or Kansas City to agree to a proposed contract which was contrary to their respective interests.
179. The Department objects that, “[t]here is no dispute that Kansas City and Western Fuels Association do not have adverse economic interests with respect to fuel supply.” [Department of Revenue’s Proposed Findings of Fact and Conclusions of Law, ¶ 73]. This is true in the sense that the common contractual ground between WFA and Kansas City includes the intention that WFA will assist Kansas City in securing a coal supply that both parties would characterize as “reliable” and “low-cost.” Findings, ¶ 13.
180. However, whether WFA and Kansas City reach this common ground with respect to any particular proposed supply was never a foregone conclusion. The essence of this aspect of their contract was for WFA to find a suitable coal supply on suitable terms, and then for Kansas City to agree or disagree. Findings, ¶¶ 14-15. The crux of WFA’s contractual performance lay in the quality of this service and the other services it provided, rather than in the price and quality of the coal supplied by Caballo Coal Company, Findings, ¶ 48, or WFW. Our view is reinforced by the fact that the WFA contract with Kansas City set no specific price. Findings, ¶¶ 16, 69-73.
181. With this perspective, the Board disagrees with the Department’s assertion that WFA had “a duty to supply coal to Kansas City at the lowest possible cost.” [Department’s Proposed Findings and Conclusions, ¶ 74]. WFA had no such contractual duty. WFA’s duty was instead to locate a source of low sulfur coal that would be “obtained by Seller…and approved by Buyer.” Findings, ¶ 14.
182. The Department argues the presence of factors warranting a conclusion, by analogy to principles governing a determination to disregard a corporate entity, that WFA exercised an undue degree of control over WFW. [Department’s Proposed Findings and Conclusions, ¶ 75]. However, the Department focused only on a list of factors normally taken into account in such a determination, Department’s Proposed Findings and Conclusions, ¶ 64, without considering the overarching principles which establish a context for the factual enquiry. The facts must be such “that an adherence to the fiction of the separate existence of the corporation would, under the particular circumstances, sanction a fraud or promote injustice.” Conclusions, ¶ 166. “The concept of piercing the corporate veil is a judicially created remedy for situations where corporations have not been operated as separate entities as contemplated by statute and, therefore, are not entitled to be treated as such.” Conclusions, ¶ 166. The facts in this case do not meet these tests.
183. The Department relies on State ex rel. Christensen v. Nugget Coal Co., 144 P.2d 944 (Wyo. 1944) to identify the injustice in this case as the evasion of tax payments through a “taxable value well below the fair market value of coal as defined by the legislature.” [Department’s Proposed Findings and Conclusions, ¶ 78]. Nugget Coal Company had operated a coal mine as a partnership from 1935 to July 6, 1939. Id. at 945. On March 30, 1939, one its employees was severely injured. Id. At the time of the injury, Nugget Coal Company had $439.68 in its account in the state Industrial Accident Fund, an amount which proved grossly insufficient to pay the claims of the injured worker, and caused an overdraft in the account. Id. Under those circumstances, the state’s payroll charges for contributions would increase until the overdraft was reduced and eliminated. Id. at 948. When Nuggett Coal incorporated, the partnership ceased to pay any money into the existing Industrial Accident Fund account, arguing that the partnership had no employees. Id. at 945. The corporation sought to open a new account, and to make contributions at rates applicable to accounts without an overdraft. Id. The Wyoming Supreme Court, in a lengthy and closely reasoned opinion, concluded the corporation was merely the alter ego of the partnership, and therefore liable for the partnership’s debt.
184. We conclude there is no behavior in this case analogous to Nugget Coal Company’s attempt to circumvent its established obligations to the state Industrial Accident Fund. In particular, we note that WFW was formed more than ten years prior to its December 5, 2000, contract with Kansas City, and formed for reasons related to the capital contribution of the Laramie River Station participants to the Dry Fork Mine. Findings, ¶¶ 24-28, 36-38. Neither party presented evidence which demonstrated the December 5, 2000, contract was motivated by an intention to manipulate WFW’s taxes. There is no claim in this case that WFW took actions to defeat the state’s ability to collect the taxes at issue should we hold against WFW. Under these circumstances, such facts as the presence of Basin and Tri-State on the Boards of WFW and WFA, the central role of the same General Manager in both organizations, and WFA’s and WFW’s reliance on the same outside counsel provide no reason to pierce the corporate veil. Conclusions, ¶ 166; see Medina v. Four Winds International Corporation, 111 F.Supp. 2d 1164 (D. Wyo. 2000); see Horowitz v. Schneider National, Inc., 708 F.Supp. 1579 (D. Wyo. 1989).
185. The Department nonetheless contends WFA actually exerted control over WFW, based on the Department’s view of four circumstances. [Department’s Proposed Findings and Conclusions, ¶¶ 76-77]. First, the Department argues the contract between WFW and Kansas City “resulted from a deal between Laramie River Station, Kansas City, and Western Fuels Association. Western Fuels - Wyoming was not even involved.” [Department’s Proposed Findings and Conclusions, ¶ 76a]. The Board generally disagrees with this characterization in favor of a more accurate statement of the origins of the contract. See Findings, ¶¶ 48-60. We also note that the contract was approved by the WFW Board, but not the WFA Board, Findings, ¶ 67, and that WFW’s mine manager in Gillette was involved in the contract negotiations. Findings, ¶ 66.
186. Second, the Department argues it “was Western Fuels Association, and not Western Fuels -Wyoming, that determined the price of coal in the contract.” [Department’s Proposed Findings and Conclusions, ¶ 76b]. This view is based entirely on Koch’s testimony concerning the document from WFA files demonstrating how Kansas City’s price under the Peabody Contract translated precisely into the price under the succeeding contract with WFW. See Findings, ¶ 55. We think it logical to infer that Fred Palmer, as General Manager for both WFA and WFW, was the source of the concept by which WFW sought to make an offer attractive enough to Kansas City to continue its supply relationship with WFW. See Findings, ¶¶ 62, 66. The Department’s characterization ignores Koch’s explanation of why that price was satisfactory to WFW, Findings, ¶¶ 56-60, and eventually approved by the WFW Board. Findings, ¶ 67. There is nothing in the record to indicate that the transaction would have occurred if the price had not been satisfactory to WFW.
187. Third, the Department argues the “Kansas City contract with Western Fuels - Wyoming was tied to the Kansas City long-term contract with Western Fuels Association; the full relationship involved both contracts and all three parties.” [Department’s Proposed Findings and Conclusions, ¶ 76c]. Having considered at length how the two contracts and three parties are related, the Board concludes that the existence of two contracts with simultaneous four-year terms does not demonstrate WFA control over WFW.
188. Fourth, the Department argues “Western Fuels Association administered the contract relationship between Kansas City and Western Fuels - Wyoming, and acted on behalf of Kansas City in administering the contract.” [Department’s Proposed Findings and Conclusions, ¶ 76d]. This was not entirely true, because WFW, not WFA, invoiced Kansas City for coal shipments. Findings, ¶ 71. More important, the services WFA provided Kansas City had originally been established under the terms of their 1979 Contract. Findings, ¶ 69. The existence of this long-standing contractual relationship, as modified on December 5, 2000, does not demonstrate that WFA controlled WFW.
189. With regard to the Department’s conviction that the price in the contract between Kansas City and WFW was “artificially low,” we have found, Findings, ¶¶ 140-149, and conclude, under the circumstances of this case, that WFW’s perspective on this question is more persuasive that of the Department. The Board does not generally endorse marginal cost or incremental pricing with this conclusion. [See Transcript Vol. III, pp. 564-565].
190. The Department argues the absence of evidence that the transaction between WFW and Kansas City occurred after reasonable exposure in a competitive market, pointing instead to a variety of motivations related to termination of the Peabody Contract, and the genesis of the WFW price in the Peabody Contract. [Department’s Proposed Findings and Conclusions, ¶¶ 79-81]. The Department has not attempted to rigorously define what a competitive market must be in the context of the bona fide arm’s-length sale definition found in Wyo. Stat. Ann. § 39-14-101(a)(ii). The Board concludes it is sufficient in this case that:
There was an active market for coal in the Powder River Basin;
WFW was a participant in that market, albeit handicapped by coal of relatively poor quality;
WFW’s participation included active efforts to market its coal, which from time to time were successful;
Kansas City’s commitment to the purchase of low sulfur Powder River Basin coal was evidenced by its 1979 Contract with WFA;
Kansas City was free to accept or reject WFW’s offer, and had prepared for the contingency of operational difficulties with the Dry Fork coal by providing for termination of the WFW contract, and assistance from WFA to secure an alternative supply consistent with the constraints of the 1979 Contract.
191. The Board rejects the Department’s argument that WFW was not a prudent seller for reasons already addressed both as findings of fact, e.g., Findings, ¶ 154, and conclusions of law, e.g., Conclusions, ¶ 176.
192. Finally, the Department contends the “rule in Wyoming is the taxable value of coal must be no less than the cost to produce the coal, including taxes and royalties.” [Department’s Proposed Findings and Conclusions, ¶ 86]. This argument rests on the Department’s reading of Hillard v. Big Horn Coal Company, 549 P.2d 293 (Wyo. 1976), principally in the context of Wyodak Resources Development Corporation v. Wyoming Department of Revenue, 60 P.3d 129 (Wyo. 2002). In Wyodak Resources, the Wyoming Supreme Court applied Hillard principles for coal sold under a non-arm’s-length agreement. Id., at 143; see also Wyodak Resources Development Corporation, Docket Nos. 99-70, 99-90, 99-158, 2000-99, August 8, 2001, 2001 WL 1040979, Conclusions of Law ¶¶ 32-35 (Wyo. St. Bd. Eq.). In this case, we have no reason to apply Hillard principles to resolve the threshold question of whether or not a transaction is a bona fide arm’s-length sale. As important, where there has been a bona fide arm’s-length sale, as in this case, the statute controls how value is to be determined. Conclusions, ¶ 161. The Department has given us no reason to employ Hillard to modify the result reached by applying the plain language of Wyo. Stat. Ann. § 39-14-103(b)(vii).
193. Because we have concluded that coal sales under the December 5, 2000, letter contract between WFW and Kansas City were bona fide arm’s-length sales, it is unnecessary to reach remaining issues concerning alternative methods of pricing and interest.
ORDER
IT IS THEREFORE HEREBY ORDERED the Department of Revenue’s audit assessment for Western Fuels - Wyoming, Inc, is reversed and remanded for proceedings not inconsistent with this opinion.
Pursuant to Wyo. Stat. Ann. § 16-3-114 and Rule 12, Wyoming Rules of Appellate Procedure, any person aggrieved or adversely affected in fact by this decision may seek judicial review in the appropriate district court by filing a petition for review within 30 days of the date of this decision.
Dated this ______ day of February, 2007.
STATE BOARD OF EQUALIZATION
_____________________________________
Alan B. Minier, Chairman
_____________________________________
Thomas R. Satterfield, Vice-Chairman
_____________________________________
Thomas D. Roberts, Member
ATTEST:
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Wendy J. Soto, Executive Secretary